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Foreign aid doesn’t hurt growth: study

Garment workers cut material from templates at a factory in the capital’s Por Sen Chey district.
Garment workers cut material from templates at a factory in the capital’s Por Sen Chey district. Vireak Mai

Foreign aid doesn’t hurt growth: study

A new study published in an international economics journal has argued that – counter to popular opinion – foreign aid has not harmed Cambodia’s economic growth.

In Does foreign aid cause ‘Dutch Disease’?: Case of Cambodia, Lao PDR, Myanmar and Vietnam, published in the Journal of Reviews on Global Economics late last month, Japanese academics compared the growth of the manufacturing sectors of the four countries between 1990 and 2012 with overseas direct aid (ODA) and gross domestic product (GDP).

“We found no evidence that they [Cambodia, Laos, Myanmar and Vietnam] have suffered from the Dutch Disease, or rather identified a positive production effect of foreign aid,” the study’s authors wrote, adding that Laos was the only one of the four countries not to experience a lift in GDP and manufacturing alongside rising levels of ODA.

“Dutch Disease” is an economic theory which argues that sudden influxes of capital to a developing economy, whether thanks to the sudden discovery of natural resources or the donation of foreign aid, trigger slumps in production.

The positive and negative impacts of ODA have long been hotly debated. A 2010 study of its effect on developing economies around the world published in the Journal of International Business and Cultural Studies concluded that “foreign aid appears to have an adverse effect on economic growth in developing countries”.

Ear Sophal, associate professor of diplomacy and world affairs at Occidental College in Los Angeles, wrote a book, Aid Dependence in Cambodia: How Foreign Assistance Undermines Democracy, on ODA’s unforeseen side effects in the Cambodian context, including corruption and lack of government accountability to taxpayers.

In an email on Sunday night, Sophal conceded that “infusions of money mean more money slushing around”, but maintained there was a price to be paid for the growth.

“As far as I’m concerned, [the government has] still got a long ways to go to clean up its act. Frankly, all this [economic growth] has been despite some world-class bad governance [corruption], so imagine what good governance could lead to in terms of economic development,” he wrote.

Miguel Chanco, the Economist Intelligence Unit’s lead analyst for the ASEAN region, said in an email yesterday he sympathised with Sophal’s stance on corruption and aid dependence, adding that donors had a responsibility to ensure the funds they provided were used to Cambodia’s benefit.

“Fundamentally, a government that gets a lot of funding from international donors doesn’t have as great an incentive to listen to taxpayers’ – that is, the public’s – concerns. The climate for corruption in Cambodia is exacerbated by the fact that there isn’t much fiscal transparency in the country,” Chango wrote.

Meanwhile, the UN Development Programme’s senior policy advisor in Cambodia, Napoleon Navarro, said ODA’s benefits should not be dismissed, arguing that NGOs would have less bargaining power if they were government-funded.

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