Free sample dissertation The Role of Foreign Aid in Economic Development in Kenya 2002-2008.

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Foreign Aid or Official Development Assistance (ODA) is the transfer of resources on concessional term, which is undertaken by official aid agencies (bilateral and multilateral) with the aim of promoting economic development and technological transfer and transfer of expertise from the aid agency to the poor countries. Foreign aid can also be in terms of money to support development projects in the poor countries.

Foreign aid can be multilateral or bilateral. Bilateral aid is provided from state to state mostly from a developed nation to a less developed country while the multilateral aid comes from international organizations such as the World Bank and the International Monetary Fund(IMF) and regional organizations such as the European Union and the African Development Bank. Foreign aid also comes from the Non-governmental Organizations. This includes transfers by private institutions in the form of donations, technical assistance, and a wide range of personal or financial participation or low-interest loans.

The core objective of foreign aid is to promote political, social and economic development though sometimes it is overridden by other interests that serve to play part, for example a donor country may extend aid to a less developed nation in order to get access to raw materials. Although there has been debate revolving the main objective of foreign aid, it is important to note that whatever the motive of the donor, at least outwardly the objective remains enhancement of development in the recipient country.

Foreign aid as a subject matter of political economy has been widely and intensely debated internationally. The main question has been as to whether foreign aid really brings development. The answer can only be provided by examining foreign aid vis-à-vis development in the third world countries..

Internationally, the foundation of today’s foreign aid was laid towards the end of the Second World War. There were international actions that led to the formation of the international organizations to oversee the postwar reconstruction. These organizations later formed the basis for the evolution of institutions such as the World Bank and the International Monetary Fund that are actively involved in foreign aid activities. In the summer of 1944, a year before the end of Second World War, U.S president, Roosevelt, convened a monetary and financial conference at Bretton Woods under the sponsorship of United Nations which didn’t officially exist. This marked the beginning of the modern development aid after signing an agreement on 22 July, 1944 to create an International Bank for Reconstruction and Development which is known today as the World Bank. IMF was also createdat the same time.

In March, 1947, the Cold War began with U.S president Harry Truman’s doctrine which laid down plans to expand American aid to include developing countries threatened by the spread of communism. On 5th June, 1947, General George Marshall, U.S secretary of state, unveiled a vast aid plan for the reconstruction of European Countries. The basis was to give massive aid to the European in order to rebuild them after the Second World War. The Marshall Plan was successful and was later used for development that could realize same results as in Europe if applied elsewhere as a development model.

In the 1960s, the United Nations proclaimed the development decade with the aim of having the developing countries reach economic take-off within ten years.In 1961, the United States Agency for International Development (USAID) was established and in 1962, the British Department For International Development (DFID) followed. Thus the early 1970s, development aid was already generalized and institutionalized.

As Africa emerged from colonialism it depended on the former colonial economy. With the competitive nature of the international economic system and the desire for capital by the African ruling elite, foreign aid was admired in Africa. It  was viewed as bringing with it the element of initiation of development projects in Africa as it had done with the Marshall Plan initiative. It was believed that foreign aid was to enhance Africa’s ability to participate in the global capitalist economy   and compete with other continents in development. All these, coupled with the modernization theory prevalent in the 1960s, made the third world countries especially in Africa to prefer foreign aid.

The role of foreign aid which primarily is that of economic development has always been contested by some scholars who argue that there are other motivations like the security of the donor countries and also that donor countries through foreign aid seek to advance and strengthen their foreign policy. However, despite the skepticism that is shown by the critics, foreign aid has actually led to development albeit with some challenges. Our study therefore seeks to examine the role that foreign aid has played in development in Kenya.


Foreign aid has been described as a tool of manipulation used by the developed countries. Foreign aid, it is said, creates the problem of underdevelopment since it subjects the recipient country to aid conditions that create a dependent relationship whereby the growth of the recipient country’s economy is determined by the donor country. Further, foreign aid is said to advance the donor interests or that it aggravates the problem it seeks to address.

However there are other scholars such as Sachs who have argued that for the third world countries to develop, external help must be seriously considered. As has been pointed out above, analysts differ with respect to the question as to whether foreign aid promotes development in the recipient country. While some people argue that foreign aid has a positive contribution, others are of the opinion that foreign aid does more harm than good in the recipient country. Our study therefore adopts the question as to whether or not foreign aid has contributed to economic development in Kenya.


  • To examine foreign aids contribution to the improvement of infrastructure, health, education and agriculture in Kenya

  • T o examine challenges posed by foreign aid.

  • To recommend ways in which the government of Kenya can deal with challenges of foreign aid in order to reap full benefits.


The study seeks to put into perspective the contribution of foreign aid in the economic development in Kenya and critically assesses both the arguments for and against the foreign aid in trying to come up with a clear understanding of the main objective of foreign aid.

The study seeks to show why the government should come up with policies that will prioritize investments in the education, health, infrastructure and agricultural sectors in order to achieve the desired economic development.

The period between 2002 and 2008 has specifically been chosen because this is the period that most of the donor countries resumed advancing foreign aid to Kenya after having stopped during the Moi era due to corruption and mismanagement. It is also a period where infrastructure, agriculture, health and education sectors have improved tremendously and at the same time institutional reforms took place to compliment foreign aid. The study also shows how a peaceful political transition from 2002 to 2003 led to conducive environment for growth while at the same time showing how political violence like what happened in 2007 election can lead to decline in economic growth.

The study hence seeks to show the connection between foreign aid and improvement of the agricultural, infrastructure, health and education sectors and how this contributes to economic development in Kenya.


Due to time and financial constraints, the study limited itself to secondary data available. The scope of the study, the institutions involved and the complexities of their operation made me to scale down to the information available to me.




Since development means different things to different people, it is therefore important to develop some agreed criteria on the measurement of development from which one can develop a working definition. According to Todaro (2005), development must be concerned with the economic,cultural,social and political requirements for affecting rapid structural and institutional transformations of the entire societies in a manner that will effectively  bring the fruits of economic development to the broadest segments of the population(Todaro &Smith,2005:47).Concepts and goals such as the elimination of poverty, rising levels of living, national independence, modernizations of institutions, political and economic participation, personal fulfillment must be considered if the development is to be achieved.

Development can therefore be defined as the set of all activities that contribute to the gradual formation of physical and human capital for the purpose of self sustained production geared towards satisfying community’s present and future needs as defined by the community itself. (Gelinas, 1998:17)

Underdevelopment can only be understood when compared with development. Thus there are identified characteristics of underdevelopment. These include; poverty, high levels of unemployment, low and stagnating levels of productivity, inappropriate education and health systems, poor infrastructure and technological backwardness.

The process of development and growth depends on various factors. These factors are of two types; economic and non-economic factors. Economic development emanates from economic activities and the transformation of the human agent and his social as well as his physical environment. The process of growth and development is being brought about by economic and non- economic variables. Economic variables here need to include natural resources, capital formation, technology, government expenditure and foreign aid. Non-economic variables include; the domestic environment, social-cultural values and institutions. These factors are interlinked through cause and effects relationship so that one factor can easily destabilize the rest. Some of the economic and non-economic factors are addressed below.


Natural resources seem to be the principal factor affecting the development of a given economy. The critical factors such as the fertility of the soil, its situation and composition, forest wealth, minerals, climate, water resources, sea resources etc. A country that is deficient of natural resources will not be in the position to develop rapidly. Although availability of natural resources is essential, proper utilization is required for actual development to be realized. Unfortunately, in most LDCs, the majority of the resources have not been fully tapped due the lack of adequate capital and technology, poor expertise, inadequate infrastructural facilities and poor resource surveys and discoveries. Lewis observes:

“The value of our resources depends upon usefulness and its usefulness is changing all the time through changes in tastes, technology or new discovery.”(W.A.Lewis, 1954)

When such changes are taking place any nation can develop itself economically through the fuller utilization of natural resources and this can happen if LCDs acquire foreign aid mostly in terms of technology.


Capital refers to all forms of productive wealth that are used both directly and indirectly in the production process. These include plant and machinery, equipment, and other materials. When capital increases with the passage of time, then there is capital accumulation (capital formation). The various direct production investments are supplemented by investments known as social and economic infrastructure (roads, electricity, water and sanitation, communication and security) which facilitates and integrates various economic activities. The degree of capital formation should be viewed as the critical determinant towards economic growth and development. This is so because increased stock paves the way to increased production capacities thereby raising production as well as employment opportunities.

There are various possibilities of increasing the rate of capital accumulation since the propensity to save is low in the majority of LDCs voluntary savings will not be forthcoming in sufficient quantities hence there is need to seek for external resources inform of loans, grants and larger exports that can help in capital formation.


Population is a critical factor in economic development. In this case populations need to be looked at in two dimensions. The first deals with population growth rate. If it exceeds the economic growth, this will result in negative par capital figures, hence economic welfare is reduced making the populace worse off. Consequently, the dependence ratio and more mouth to feed are increased against the few active members of the population to make food. This leads to fall in desired savings and investments therefore retarding economic growth. Such population presents an obstacle to economic growth.

The other dimension is that population growth will imply a large labor force and increased potential of domestic market, but this need to be subject to its ability to purchase. For any country to achieve economic development when it has labor surplus, human capital need be emphasized. This is because human capital increases the efficiency of labor. The government therefore has to spend a lot on health, education to raise the life expectancy period and literacy levels respectively and also research and development is key to economic development.


Technological changes are regarded as the most important factor in the process of economic growth. They are related to changes in the methods of production which is the result of some new techniques of research or innovation. Changes in technology lead to increase in productivity of labor, capital and other factors of production. Kuznets traces five distinct patterns in the growth of technology in the modern economic growth. They are; a scientific discovery or an additional to technical knowledge, an invention, an innovation, an improvement and the spread of innovation (Kuznet, 1971).


The social, economic and political institution in a country constitutes its domestic environment. The quality of the country’s domestic environment determines the country’s rate of growth, that is, the degree and level of the utilization of the country’s resources. The government in any country is a key political institution meaning its behavior will always act as a stimulating economic activity. Political stability is of essence for economic development. A country’s social institutions consist of its cultural values, attitudes and institutions. These social institutions affect the level of economic activities for they determine for instance consumption patterns, models of economic organizations, labor efficiency and attitudes towards work.

All these equally call for good governance which entails sound management of economic resources, building capacity for the analysis and formation of sound policies and their implementation. Similarly, by providing security for an enabling environment for economic activities both public and private will attract investment. In addition there should be equity and social justice in resource allocation not forgetting an end to corruption and political manipulation.

Development is not just having plenty of wealth nor is it purely an economic phenomenon. It embraces all aspects of social behavior, the establishment of law and order and positive attitudes towards law and order

The social attitudes, values and institutions should be changed or modified for economic development to take place. But it is not an easy task. Any social change will bring discontent and resistance in its wake. It may therefore adversely affect the national economy. Therefore all cultural changes should be selective. The changes should be selective and should be introduced in stages. Persuasion and not coercion should be the method.

Myrdal in his book ‘Asian drama’ (1968) advocated for the adoption of ‘modernization values’ or ‘modernization ideas’ for the rapid  economic development LDCs. Modernization means social, cultural and psychological framework which facilitates the application of tested knowledge to all phases and branches of production.(Myrdal,1968)

Myrdal continues to argue that for LDCs to achieve economic development they must first achieve national consolidation, by this, he means ‘a national system of government. Courts and administration that is effective, cohesive and internally united in purpose and action with unchallenged authority over all regions and groups’.(Myrdal,1968)

Foreign aid therefore becomes critical in helping the developing nations utilize their natural resources through making available the technology required. Foreign aid will also help in improving the education and health systems in the developing countries. Aid can also help in capacity building of both economic and political institutions so as to provide a conducive domestic environment for economic growth.

In light with this, many scholars have therefore advocated for advancement of foreign aid to LDCs.One of such scholars is Jeffrey Sachs(2005) who explains the role foreign aid plays in the development by use of what he calls poverty trap. He argues that a household that is impoverished has its income going into consumption, just to stay alive. There are no taxes or personal savings, depreciation and population growth continue relentlessly. This leads to a vicious circle of falling incomes, zero savings and hence zero investments.Sachs therefore proposes a solution in the form of Official Development Assistance. This will help in jumpstarting the process of capital accumulation, economic growth and rising household incomes. The foreign aid feeds into three channels, a little bit goes directly to households mainly for humanitarian emergencies such as food incase of drought, some is directed to the budget to finance public investment and some towards private businesses (e.g. farmers through microfinance institutions).

If foreign aid is substantial enough and lasts long enough, the capital stock rises sufficiently to lift households above subsistence. At that point poverty trap is broken (Sachs, 2005:44)

As a result growth becomes self-sustaining through household savings and public investments supported by taxations of households. In this case aid is not a welfare handout, but is actually an investment that breaks dependence once and for all.

Sachs goes on to point out that foreign aid is paramount in enhancing and improving human capital which entails good education and a healthy nation, infrastructure which includes roads, power, airports and seaports and telecommunication systems and improvement in the agricultural sector that is very crucial to put a country in the path to industrialization (Sachs,2005:246).

Sachs offers an example of Poland that was able to emerge from communism to capitalism. He was personally involved in 1989 in advising the government of Poland on how to become a market economy, stabilize her economy mostly in dealing with the hyper inflation. What he did was to come up with a stabilizing fund for the Polish currency, the Zloty Stabilizing Fund. To do this Poland needed foreign exchange reserves and the U.S   government gave $ 200 million and other donor countries gave $ 800 million. In Poland, foreign aid was therefore able to take Poland out of a crisis and put it on the path of economic development.

South Korea also confirms some linear stages in development as advocated by modernization theorists who strongly believe in the idea of foreign aid as a catalyst for economic development. Its share of investment in the national income has been among the highest in the world. South Korea which was a Japanese colony until 1945 has been able to develop through foreign aid. South Korea received a large portion of its budget from the U.S in the 1950s.South Korea went ahead to carry out an extremely active upgrading policy, sharply limiting the role of MNCs and deliberately establishing indigenous industries as an alternative. South Korea also implemented one of most comprehensive land reform programs in the developing world and placed strong emphasis on primary education.

Contrastingly, the case of Argentina presents a rather different scenario. The country relied to a larger extent on exporting primary goods, and real prices of these goods fell compared to imports. MNCs played a larger role and Argentina was unable to create its own viable manufacturing export industries ultimately having to submit to stringent structural programs, sell state industries and other constraints. Proponents of the dependency theory can claim with some justification that Argentina’s conditioned development fell victim to Developed nation’s economic interests especially from Britain and U.S.

However, looking critically at Argentina, one realizes there were faulty interventionist restrictions, inefficient state enterprises, bias against production of exports and unnecessary red tape which ended up hurting the industry.(World Bank,1987:Managing the Industrial Transition).

Some scholars especially those from the Third World countries have totally been against foreign aid because to them, foreign aid only serves as a catalyst for underdevelopment in the third world. Henrique Fernando Cardosso (1979) argues that Third World dependency is not as a result of lack of capital or entrepreneur capacity; it is the nature of the relationship between the central and the periphery. Third world countries have been relegated to the peripheral capitalism characterized by production of raw materials, availability of cheap labor and dependent structures, systems and institutions while the developed nations( the center) is characterized by high levels of manufacturing, abundant skilled labor and sophisticated economies and massive surplus accumulation. Cardosso argues that that the centre develops by under developing the periphery. He therefore notes that the solution is disengagement from the center so that the third world countries adopt socialism.

Steven Langdom and Raphael Kaplinsky (1978)  supported Cardosso’s observation and argued further that in the case of Kenya there was indeed a domestic bourgeoisie at independence. Unfortunately, the capital accumulated by the domestic bourgeoisie was not based on any form of production. Instead, these were capital handouts passed over by the departing colonial authority to guarantee production. The domestic bourgeoisie has successfully used the state power to insubordinate domestic capital to international capital.

The problem of underdevelopment led to the Latin America, through Economic Commission of Latin American Countries to come up with an inward oriented policy in order to develop and run away from dependency. Import Substitution Industrialization (I.S.I) was considered the solution. They didn’t want foreign aid as they argued that the developed nations used foreign aid to exploit them.

These countries had realized that heir products registered low income elasticity in the international markets and therefore value addition was mandatory. To them, I.S.I was the surest way to satisfy domestic market demands, they wanted to familiarize and socialize locals to consume their own goods and services,  this is because if an economy is too open, then the people tend to be alienated from their goods and services hence local products loose market

Although I.S.I had become popular because it was viewed as a way in which the Third World would achieve development and it represented a partial disengagement from the industrialized economies which were to blame for dependency in the third world, it failed. Various reasons can be given to explain this. First, Latin American countries didn’t have sufficient capital in which to set up industrial base on which I.S.I was to be developed. This is because they had been importing a large number of goods, it was mandatory they set up large industries to produce goods that had been identified for substitution. Secondly, industrial growth relies heavily on technology which these countries didn’t have. Third, they lacked skills and expertise that industrialization requires mainly because they were economies that were just emerging from colonialism.

To try and solve these problems, Latin American countries partnered with Multi-National Corporations in order to bring the needed capital, technology and expertise. However, these MNCs went ahead to dominate the economies hence contradicting their aim which was to run away from foreign domination.

I.S.I was an attempt to achieve self reliant based industrial development through inward oriented policy but failed hence reinforcing the argument that foreign aid is important in LDCs development up to the stage of self-sufficiency.

Although many scholars that advocate for foreign aid are right in observing that it facilitates building of roads, increases agricultural productivity and leads to education and health improvement, many have not critically addressed foreign aid in  the context of value addition to primary products in LDCs which will totally change the trading patterns in the international trade. If substantial foreign aid was directed to increasing exports (value added), even the aid required by LDCs will significantly reduce. If developing countries increased their share of world exports by just 5%, these would generate 350 billion dollars, seven times as much as they receive in aid. The $70 billion that Africa would generate through 1% increase in the share of world’s export is approximately five times the amount provided to the region through aid and relief (Oxfam Report, 2002)

In conclusion, foreign aid cannot achieve development in isolation; there must be attitude change and the right political environment to compliment the foreign aid. Aid should be directed towards   value addition on primary products so as to increase market share of exports in order to realize development that is balance between the Developed and Developing countries.


Opinion is divided as to whether foreign aid actually stimulates economic development or it is a tool to exploit the Third World. One school of thought dominated by modernization theory views foreign aid as almost indispensable in the economic development of the developing countries. This school of thought argues that development is a linear process from a comparatively low level and finally achieving final levels of development. Modernization theorists summarized development as composed of; increased level of urbanization, widespread literacy, enhanced communication systems, reliable road networks high level of commercialization and industrialization in the economy. To achieve this, modernization theorists argue that foreign aid is imperative as it accelerates investments and helps in improving the structural problems in the third world.

Modernization theorists observed that development process moved through specific stages. In his analysis, Walt W. Rostow pointed out that the transition from underdevelopment to development can be described in terms of steps or stages through which all countries must proceed. Rostow observed; “. . . it is possible to identify all societies in the economic dimensions as lying within one five categories: traditional society, the pre-condition for take off into the self-sustaining growth, take off, the drive to maturity, and the age of mass consumption.“ (Rostow, 1960:12)

Rostow went on to argue that the developed countries had passed the stage of take-off into the self-sustaining growth and therefore the underdeveloped nations that were either still in  the traditional society or the  pre-condition stage had only to follow a certain set of rules of development to take-off towards self-sustaining economic growth. One of the strategies of development for any take-off was mobilization of domestic and foreign savings in order to generate sufficient investment to accelerate growth. According to Rostow, the rate of investment in the developing countries can be enhanced by the injection of foreign aid. Foreign aid though necessary but not sufficient plays an important role in speeding up the process of attaining self-sustaining growth. Aid is hence beneficial and only relevant during the period prior to take-off after which the recipient country look forward to a time when extra-ordinary measures to obtain capital from outside can be discontinued.

In order to understand modernization fully, it is imperative to look critically at every stage as discussed by Rostow.Rostow observes that in all these stages, growth causes structural changes within society so that it moves from simplicity to greater levels of production and sophistication.

First, there is the Traditional stage. This stage is characterized by a ceiling on productivity imposed by limitation of the application of science and technology, a very high proportion of workforce engaged in agriculture, and at this stage, traditions rule people and the customs and beliefs have the final word. It is not easy to change such a society which is submerged with prejudices, beliefs and customs and where everything is looked down upon with suspicion. Planning growth in such a society will require greater focus in agriculture, power and irrigation projects. Most societies have come of this stage due to external challenges and aggression or nationalization.

The second stage is the Pre-condition for Take-Off. According to Rostow, this is the transition era in which pre-conditions are created for sustained growth.These conditions include; fundamental changes in the economic structures which involves changes in the societies attitude towards science, risk-taking and profit earning, political  freedom, development of centralized taxation system, land reforms, and development of social-overhead capital( education and health).Rostow continues to argue that at his stage, investments should be raised to at least 5% of the national income in order to ensure self-sustaining growth, investments need to directed in the development of various infrastructural facilitates and on the social front a new elite must emerge to fabricate the industrial society. The length of the transition will depend on the speed at which the local talent, energy and resources are mobilized and devoted to modernization alongside with political leadership.

The third stage is the take-off. It is a very short stage in which development becomes self- sustaining. The stage is characterized by three events. First, a proportion of the net investment to national income rises from 5% to 10%.Seondly,the appearance of one or more substantial  income manufacturing with high rate of growth. Thirdly, the existence of quick emergence of political and institutional framework which exploits the impulse to expansion and gives growth an ongoing character. There must be institutions which would be able to mobilize savings from extra incomes and enhance further investments.

The fourth stage is the drive to maturity. This is a stage where the society effectively applies the range of modern technology to the bulky of its resources. In such stage the rates of savings and investments are of such magnitude that economic growth and development becomes more less automatic. There is equally social, cultural and attitudinal changes and transformation of people values and morals. There is greater degree of urbanization with the proportion of professional labor increasing, the people aspire for technological progress and new trading sectors emerge.

The fifth and final stage is the stage of high mass consumption .Here, the society shifts the production of the mass consumer goods and durable goods. At this stage  there is high standards of living with automobiles being extensively used, high consumption of durables and household gadgets, welfare is considered vital and society focuses on expansion of power beyond national frontiers. There is equitable distribution of income through taxation policy and there is increased financial security.

Rostow’s arguments have been greatly criticized by other economists. Kuznet points out that Rostow’s stages are considerably blurred. Much of which Rostow considers take-off Kuznets argues has already occurred at the pre-condition stage. Kuznet continues to argue that Rostow lacks analytical power since data for great Britain do not indicate any take-off at all, but rather a slow and relatively steady acceleration throughout the whole period from 1770-1914.

Despite the fact that Rostow’s model may be lacking analytical power, the purpose of stages is not that stages distinguished should necessarily have parallel in history, or be rigidly distinct, but to distinguish situations in which an economy may find itself. Rostow has also stressed the importance of agriculture and investment in the economic growth. It should be acknowledged that certain political and sociological pre-conditions for development which are forgotten by nations are mentioned by Rostow.

The opposite school of thought which is Dependency Theory argues that foreign aid is basically an exploitative instrument that increases external dependency and internal underdevelopment in the third world. Proponents of dependency theory, like Theotonio Dos Santos points out that foreign aid has subjected third world countries to financial dependency where they have to seek capital from outside. Santos observes; “Underdevelopment, far from constituting a state of backwardness prior to capitalism, is rather a consequence and a particular form of capitalism…Dependency is a conditioning situation in which the economies of one group of countries are conditioned by the development and expansion of others…” (Santos, 1969:21)

Dos Santos observes that foreign aid has subjected third world countries to financial dependency. Funding, according to Santos, is so conditioned to the extent that it imposes particular policy demands on the recipient country’s economy. For instance, the privatization of government parastatals, reduction of the government workforce, liberalization of the economy among others. Secondly, foreign aid has led to high levels of external debt which means that most of the third world countries spend a significant amount of their income not for development but for debt repayment. Consequently, this behavior continues to see large resources being transferred from third world to industrialized nations making interest rates become quite high and therefore capital becomes very expensive. Another form of dependency emanates from the technological backwardness of the third world countries. This means that they depend on the developed nations that are technologically advanced hence becoming consumers of other’s technology. The problem becomes further complicated since they can’t reproduce this technology as it is highly patented through copyright policies. Moreover, developed nations are capital intensive while the LDCs enjoy comparative advantage of labor, the consequence is that the  developed nations’ technology  reduce the opportunities for employment in the third world countries  hence not appropriate for development.

The dependencistors attribute the existence and continuance of underdevelopment primarily to the historical evolution of a highly unequal international capitalist system of rich country- poor country relationship. The co-existence of rich and poor countries in an international system dominated by such unequal power relationships between the center(rich nations) and the periphery(poor nations) renders attempts by poor nations to be self-reliant and independent difficult and sometimes even impossible. They go on to argue that institutions either knowingly or unknowingly serve the interests of the powerful nations.

Critics of the dependency school of thought have argued that the dependency theorists do not offer viable alternatives to underdevelopment. This is because, first, they blame the developed nations for underdevelopment in the LDCs while ignoring the internal factors that have actually contributed immensely to underdevelopment. These internal factors include; political instability, ethnic polarization, bad governance, lack of prioritization of development projects and inefficiency on the part of the civil service. Secondly, it proposes disengagement from the international trade which in essence is self –defeating as this would lead to the collapse of the third world economies. Thirdly, dependecistors advocate for Import-Substitution Industrialization (I.S.I.) as tried by Latin Americans, unfortunately this strategy failed because these countries didn’t have the necessary capital,technology,expertise and skills needed which could only be acquired through aid.

Despite the dependency theory failing to give viable alternatives, it cannot be out-rightly dismissed as it has some valid arguments. For example, the dependencistors argue that the process of social and attitudes change should be evolutionary rather than revolutionary. Otherwise radical changes in social attitudes and values will bring about dissatisfaction, discontentment and violence in their wake and retard the path to economic development.


In this chapter, both the Modernization and Dependency theories of development have been reviewed. Each theory has both its strengths and weaknesses. The fact that there exist disagreements be they ideological or theoretical makes the study of development both challenging and exciting. The question that emerges is whether a consensus will ever emerge. However, despite the disagreements, something of significance can be extracted from each of the theories. For example, the linear stages model emphasizes the crucial role that the savings and investment plays in the long-run economic growth and the need for foreign aid to augment domestic savings in order to accelerate growth. On the other hand, dependency theorists have argued that there is need to appreciate the fact that the structure and the workings of the world economies is that it negatively affect the developing countries’ economies. This study therefore proceeds on the assumption based on the modernization theory that foreign aid is necessary in economic development until the stage of self sufficiency is achieved while at the same time recommending solutions to cope with the challenges that arise thereof.


  • The foreign aid advanced to Kenya in form of grants and loans has led to economic growth hence contributing to economic development.

  • The more effectively and efficiently foreign aid is used, the more development is achieved.


The data that informs this study was gathered from literature books, government economic surveys as well as World Bank’s reports. It involved secondary data which was analyzed to get the economic growth rates under study and to know how much foreign aid has been advanced to health, education, agriculture and infrastructure and how this led to overall economic growth



Chapter one

Introduction section which gives summarized information on the background/introduction and the justification of the study as well as literature review and theoretical framework.

Chapter two

This chapter looks at the different types of foreign aid and the connection between foreign aid and economic development.

Chapter three

The chapter presents an overview of Kenya’s economic development from independence, the challenges and how these development challenges have been tackled.

Chapter four

This chapter looks at Kenya’s economic development from 2002 to 2008 and how foreign aid advanced to Kenya especially in education, health, agriculture and infrastructure sectors has contributed to economic development.

Chapter five

The chapter presents the findings, recommendations as well as conclusion for the study.



Foreign aid is advanced from developed economies either for economic, political, or humanitarian motives. The principal economic rationale for aid is to increase growth rate of Gross Domestic Product (GDP) in recipient countries in order to fight poverty, malnutrition and help in raising the standards of living especially housing. To achieve this, developing countries must ensure there is economic growth that is sustainable and this usually requires imported capital goods. Unfortunately, developing countries face two fundamental constraints or financial gaps.

First, domestic savings rates are insufficient to provide resources to meet desired levels of investment. Second, foreign exchange through export earnings is inadequate to finance all the desired imports of capital goods and hence unable to achieve the targeted growth rate. Capital inflows are therefore meant to fill these gaps and contribute in achieving target growth rates.

A general hypotheses is that aid contributes to growth. But the debate on aid effectiveness has drawn mixed reactions among scholars and policy makers both in the donor and recipient countries. While others argue that development cannot be directly linked to foreign aid, there are countries where aid has led to development. United Kingdom and United States of America borrowed in their initial stages of their economic take-off(Kuznet:1965)

These countries took advantage of such inflows to build the necessary social infrastructure; others in Africa where aid has led to growth are Mauritius and Botswana.


Aid can take either of two forms: grants or loans. Grants refer to outright transfer payments either in money terms or technical assistance which don’t have to be repaid. Loans on the other hand, refer to funds from one economic entity to another, which must be repaid with interest over a prescribed period of time. Loans may be ‘hard’ or ‘soft’. Hard loans are those given at market rates of interest while soft loans are those given at concessionary or low rates of interest.


Aid may be tied or untied. Tied aid refers to that given with restrictions while untied aid refers( also known as general purpose aid or program, on-project aid) to that aid given without restrictions. Restrictions tend to be of two kinds: those on where the recipient can spend the aid and those on how the aid can be used. Spending restrictions normally take the form of tying aid to purchases from the donor country( procurement tying).This reduces the real worth of the aid because it prevents the recipients from shopping around to find exactly the goods they want from the cheapest markets. A ‘use’ restriction normally means tying aid to cover the foreign exchange costs of an identifiable project. Such aid is known as project aid. Restricting the use of aid to particular projects, as well, to a country’s goods amounts to double tying. Tying can be very costly since there are many costs of tying apart from the inability of the recipient to buy in the cheapest markets. This is because if there is double tying, the project for which aid is given might not fit perfectly into the recipient country’s development program , the technology might be inappropriate, the donor may raise the import content unnecessarily, the suppliers may exploit knowing that they have a captive consumer, and servicing over the life of the investment may be expensive.


Aid may be provided bilaterally and multilaterally. Bilateral provision of aid refers to the provision of aid directly from one government to another. For example, Japan to Kenya while multilateral provision of aid refers indirect provision of aid from one government to another through the vehicle of multilateral agency such as the WB and IMF.It may also be channeled through NGOs.


Scholars have identified three motives for giving aid, political, military and historical motives. Foreign aid is part of the foreign policy of a donor country. This is where aid is seen as an instrument in pursuit of national interests. Security interests rank high as well as economic interests. United States’ foreign aid has always been driven by security interests. United Kingdom and French aid tends to be concentrated on ex-colonial territories reflecting strong political ties. There is also the moral, humanitarian motive to assist countries and particularly poor people in poor countries. An example would include U.S. helping the earthquake victims in Haiti. There are also economic motives for developed countries investing in developing countries not only to raise the growth rate of the developing countries but also to cater for their own welfare.


One of the developing Worlds’ greatest challenges is halving the incidence of absolute poverty defined by the international poverty line of $1 per person per day. According to World Bank (2000), simply preventing the number of poor people from increasing in Africa requires annual growth of 5%, while cutting the number of poor people by half by 2015 will take growth rate of 7% or more. But Least Developed Countries (LDCs) are characterized as ‘capital poor’ and have low saving rates. In Africa, for example, saving levels in the 1990s were on average 13% of G.D.P. Such savings are too low to support the recommended growth rates. The importation of foreign capital helps reduce the shortage of domestic savings through the inflow of capital equipments and raw materials thereby raising the marginal rate of capital formation. Secondly, along with low-savings and low investment which imply capital deficiency, LDCs suffer from technological backwardness. This is reflected in high average costs of production. Foreign capital overcomes not only capital deficiency but also technological backwardness. It brings sufficient physical and financial capital along with technical know-how, skilled manpower, organizational experience etc. All these accelerate economic development. With sufficient technological know-how, LDCs can undertake big projects like rail and modern road construction.

Thirdly, foreign capital helps in industrializing the economy. It helps LDCs to start basic and key industries (e.g. steel, machine tools, heavy electrical and chemical plants), something they could not do by themselves. It also helps in increasing the productivity hence leading to an increase in the demand of industrial products like mobile phones, electrical products as people in rural areas increase their incomes as a result of increased farm incomes.

Fourthly, foreign aid opens up inaccessible areas, tap new resources and helps in augmenting natural resources hence solving the problem of regional imbalances. It does this by assuming all risks and losses that go with the pioneering stage since private enterprise in LDCs is reluctant to undertake risky ventures such as exploitation of untapped natural resources.

Fifthly, by creating a country’s infrastructure, establishing new industries, tapping new resources, and opening up new areas, foreign aid creates more employment in urban sector leading to the migration of surplus labor from the rural to the urban sector.

Sixthly, all the above imply that foreign aid raise the level of national productivity, income and employment which in turn lead to higher real wages for labor, lower prices to consumers and rise in their standards of living. With the inflow of foreign capital, local labor becomes skilled, its marginal productivity increases thereby raising real total wages for labor.

By importing superior technology, management, machines and equipment, large quantities of new and quality products are available to consumers at lower prices.

Lastly, foreign aid overcomes the problem of balance of payments experienced by the LDCs in the process of development. A typical LDC needs import goods, raw materials, technical know-how etc in order to accelerate its economic growth. Developing country’s exports to developed countries are either stagnant or have a tendency to decline. There exists therefore, a gap between the country’s imports and exports, which leads to balance of payments’ deficit. It is through foreign aid that such a country can meet most of her imports requirement while at the same time avoiding balance of payment difficulties.

However, arguments against foreign aid have been advanced. First, foreign aid may lead to external control of the recipient country’s economy by funding populist projects without viable productive capacity in order to support the ruling regime. Secondly, foreign aid is highly conditioned to the extent that many recipient countries are forced into other agreements which may contradict their interests.Thirdly; foreign aid transfers capital intensive technologies which undermine the labor potential that many developing countries have comparative advantage of. Finally, in most developing countries, foreign aid does not solve the balance of payments deficit more so if the aid received is used to buy capital goods from the donor country.


The provision of aid has played a major part in development in many third world countries. Foreign aid therefore must be viewed positively as a catalyst for development while still appreciating its shortcomings. However it must be noted that foreign aid only yields maximum results if coupled with the necessary social and political reforms especially political stability and sound governance and an entrepreneurial spirit on the part of the citizens.



Kenya is located in East Africa with an estimated area of about 528,646 km squared with a population of 39.8 million people. Kenya was a British colony and got its independence in 1963 subsequently becoming a Republic in1964.By this time, a significant private sector based on commercial agriculture and light manufacturing had developed. Thus by 1963, Kenya had one of the most diversified and advanced economies in Africa. Kenya went on to adopt the Sessional Paper no. 10 of 1965, ‘African Socialism and its Application to Planning in Kenya’. The paper envisaged private sector led economy with an increasing role of the State in certain ‘Strategic sectors’ of the economy. Indeed, the development policy envisaged in the sessional paper implicitly rejected the notion that the integration into the global capitalist economy would lead to underdevelopment in the third world, a view mostly held by ‘Dependency Theory’. Instead foreign investment was encouraged. However, a   policy of gradual ‘Africanizing’ the economy, for instance, foreign investors to partner with indigenous Kenyans was to be pursed. Moreover, the country would pursue an import substitution strategy for industrialization.

However, the development path undertaken ended up benefiting a section of new elite that was able to take advantage of their proximity to state patronage to greatly enhance their wealth. This led to regional inequalities, formation of social stratification and problems started affecting Kenya. These were further enhanced for instance, through the spread of cooperatives and eventually through the formation of the Ndegwa Commission which encouraged civil servants to set up businesses while still working in the public service. This created the problem of corruption that still remains today as Kenya’s biggest challenge to economic development. Throughout 1960s to 1970s, Kenya’s economic growth was very high, considerable progress was recorded in expanding access to essential services (basic education) and poverty levels declined. The inequalities that emerged from sessional paper no. 10 led to the formation of District for Rural development in 1983 during the Moi regime. Unfortunately, this model was running out of dynamism and hence Kenya was characterized by high rates of unemployment. During this time, extensive structural reforms were being demanded by donors and the international development institutions.

An expansionary economic policy characterized by large public investments, support of small agricultural units and incentive for private (foreign and domestic) industrial investment had played an important role in the first decade after independence. During this decade the growth rate was 7% annually. From 1973-1980, the oil crises helped lower GDP to an annual rate of 5%.Along with oil price shock, lack of adequate domestic saving and investment slowed the growth of the economy. Various economic policies designed to promote industrial growth led to a neglect of agriculture and a consequent decline in the farm prices, farm production and farmers income leading to rural-urban migration. the slowdown of the GDP persisted from 1980 to 1985 when the annual average growth was 2.6%.It was a period in which the political shakiness of the 1982 and the severe drought of 1984 contributed to break the industrial growth. Towards the 1990, the Moi regime was beset by corruption, cronyism and economic plunder. This is the time that Kenya seriously experienced economic problems, high rate of school drop outs, dilapitated infrastructure, declining agricultural sector among other social and economic problems. By, 1990, Kenya’s per capita income was 9% lower than it was in 1980: $370 compared to $410.It continued to decline and GDP per capita fell at an annual rate of 0.3% throughout the decade. Urban unemployment rose to about 30%.This led to widespread poverty, high unemployment and growing income inequality. Kenya also experienced spread ethnic violence and ethnic upheavals especially in 1992.

Agricultural sector comprised 23% of 2000 GDP and 77% of merchandise exports hence agriculture is the backbone of the Kenyan economy. Because of this importance, the Kenyan government has come up with several policies to nourish the agricultural sector. Two of such policies include setting attractive producer prices and making affordable fertilizer. Kenya’s chief exports are coffee, tea, sisal, cashew nuts, pyrethrum and horticultural products. Although Kenya is chiefly agrarian, she is the most industrialized country in East Africa. Public and Private industry accounted for 16% of GDP in 2000.Kenya’s chief manufacturing activities include food processing and production of beverages, tobacco, footwear, textiles, cement, metal products, paper and chemicals. To improve manufacturing and industrialization sector, Kenya has tried to improve the road network, airports and seaports in order to facilitate transport and lower the cost of doing business.

From 2003, after President Kibaki took over, the government has prioritized infrastructure since it is the catalyst of both agricultural and industrial growth. From 2006 towards 2007 the economy was growing at an average of 7% and this was as a result of growth in the agricultural sector aided by good infrastructure which has been funded by partly by the Kenya government, WB, African Development Bank as well as individual donor countries. Unfortunately, 7% growth rate was reversed by the late 2007 and the early 2008 election violence. The growth rate dropped to 1.7% annually in the year 2008.In the following years the economy started picking up due to both political and economic reforms that have been undertaken, more so the passing of the constitution and the respect of the National Accord between the two principals. At this point economy was projected to grow at an average of 4-5% annually.

To achieve and sustain this economic growth, the government of Kenya has embarked on an ambitious programme of building roads, expanding airports and putting into place agricultural policies that will lead to increased food production to ensure food security. This is in line with the Vision 2030 where Kenya wants to a middle income economy by 2030 with an economic growth of 10% annually.


Kenya economic development heavily depends on increased agricultural productivity, reliable infrastructure and emphasis on affordable and accessible healthcare as well access to education mostly primary education. Foreign aid will therefore be needed if Kenya is to realize vision 2030 and reach that stage of self-suffiency. Political Stability and fight against corruption must also be given priority.

                                                             CHAPTER 4


The period prior to 2003 saw Kenya performs poorly in terms of economic growth and the different economic sectors were not performing well. This chapter looks at how the country was in 2002 before the change of regime, assesses how the economy performed from2003 to2007 and in the year 2008 after the post election violence. The chapter will also look at specific sectors namely; education, health, infrastructure and agriculture in terms of how much foreign aid has been directed to these sectors as well as the role they play in the economic development.

Kenya’s economy recorded a slight growth of 1.1% in 2002 compared to 1.2% in 2001.This slow growth was attributed to the effects of poor infrastructure, low domestic credit, low output and prices of major agricultural exports and the uncertainties regarding the general election. Government borrowing from domestic market increased by13% from Kshs.100,383 million to 113,384 million in 2002 as withholdings of donor funding continued.(Kenya’s Economic survey 2003:Pg 1)

In 2003, National Rainbow Coalition (NARC) government after taking office through a democratic process and peaceful transition, embarked on reforms aimed at jumpstarting the economy in order to create additional jobs, improve governance and reduce the level of poverty in the society. The government therefore put in place an Economic Recovery for Job Creation and Poverty Reduction (ERPR).The strategy defined a new strategic direction and spelled out priorities that will lead to rapid economic growth. In the productive sector, increased investment in infrastructure, agriculture, manufacturing, tourism trade and industry were accorded priority while in the social sector increasing access to education and health services and facilities received special attention. The fight against corruption and promotion of good governance were also prioritized. These initiatives resulted to generating confidence among foreign and domestic investors. The country therefore expected to receive budgetary support from development partners to finance priority programs that would revamp economic growth. Resumption of donor funding also increased the investors’ confidence thus increasing the investment level in the country.

To understand the role of foreign aid in development in Kenya it is important to look critically at these specific sectoral areas namely; education, health, infrastructure and agriculture.


Education must be critically considered if Kenya is to realize a sustainable economic development. This is because education is fundamental strategy in human resource development. A properly skilled human resource is an asset to effective management and utilization for resources for increased productivity. Effective management and enhanced productivity requires a well trained and healthy human resource.

Unfortunately, Kenya has faced numerous challenges in trying to make education accessible to all especially primary school education. These challenges include cost of education and inequity in access, under-enrollment and school drop-out. To make sure that education especially primary school is accessible to all, the government has sought the help of donors. In 2003,the NARC government took over and introduced free primary education which is funded by the government of Kenya and the United Kingdom Department For International Development.(DFID).In 2003,the government at a cost of Kshs.3.6 billion and DFID at a cost of ksh 1.2 billion met the cost of teaching and learning materials, wages of critical non-teaching staff and co-curricular activities at a cost of Kshs 647 per pupil. World Bank also committed grants during the year 2003 totaling Kshs 3.8 billion in supply of the teaching and learning materials in public primary schools. As a result enrollment in primary school increased by 17.6% from 6.1 million in 2002 to 7.2 million in 2003.(Kenya’s economic survey 2004).Primary school enrollment also grew from 7.6 million in 2006 to 8.2 million in 2007.The continued rise in enrollment indicates positive  steps towards realizing the millennium development goal of universal primary education. In 2004, only about 60% of primary students completed their education compared with 80% in 2008.The transition from primary to secondary and later to tertiary and university education has also improved in recent years due to improved public and private investment in the education sector( increase in transition levels has led to economic development since the number of those dropping out of school and hence engaging in crime has significantly reduced. The amount that would have otherwise been used to fight crime can be used for development purposes.


In the health sector, the government is also very keen in ensuring that every individual has access to affordable health care. This is because a healthy manpower is productive hence needed if increasing both the industrial and the agricultural production is anything to go by.

However, unfavorable distribution of health services continue to widen with observed disparities and affordability across the country. In 2002, only 42% of the population had access to health facilities within 4km radius and 75% within 8 km. Although the government has always come up with excellent programs to ensure accessibility to health care to all, shortage of funds has always been the hindrance. To address this inadequacy of resources the government has therefore sought the help of the donors. This is because the National Hospital Insurance Fund (NHIF) finances partial in-patient care services for its members. Additionally, HIV and AIDS present a major challenge to Kenya’s development. The rapid increase in the number of HIV/AIDS infected people has always presented a major challenge to the provision of health services.

The government of Kenya overwhelmed by this challenge has partnered with World Bank for funding. In 2003, the WB released US$ 80 million for Kenya to expand the coverage of targeted HIV and AIDS interventions to prevent and mitigate the impact of the disease. Under the project, Total War Against HIV and AIDS (TOWA), this helped to reduce the prevalence of HIV and AIDS from over13% in 2001 to about 6 % in 2005, further strengthening the governance of National AIDS Control Council (NACC), the lead agency for designing strategies and overseeing the implementation the programs to control the pandemic. The British Department For International Development(DFID) also gave US $33 Million towards the TOWA project(http// initiative will see over 5 million people in Kenya especially orphans and young women who are directly and indirectly affected and made vulnerable be reached and supported. As a result this will in turn lead to accelerated economic growth as more healthy people engage in production either in industries or the agricultural sector.


Infrastructure is core to any country’s economic growth, this is because it affects any other sector o f the economy in that you need good roads, rail and airports to transport people, agricultural and industrial produce from one point to the other. Other infrastructural areas include; telecommunication and ports. The government of Kenya has therefore embarked on an ambitious program of building infrastructure mainly roads, expanding airports and ports in order to ease the flow of goods in and out of Kenya. This has seen the government like the construction of Thika super highway which is funded partly by African Development Bank and the government. This will reduce traffic jam as well as lower the cost of doing business due to fast movement of goods and hence lead to achieving the objectives of the vision 2030 which aims at reaching an economic growth of 10% annually. Another major project being undertaken is the 250 billion Lamu free-port which will see the development of a new transport corridor to southern Sudan and Ethiopia. The government of Kenya secured a 1.2 billion funding from China and Japan for the feasibility Study. This project will spur economic growth as it will open up the Northern Kenya. This project is expected to approximately create 1.5 million direct and indirect job opportunities.

In 2008, WB’s portfolio in Kenya comprised of 15 projects with a total commitment of almost US$ 1 billion in all key development areas including infrastructure. For example, the World Bank in 2007 approved the Transparency Communications Infrastructure project funding amounting to US$ 164.5 million that targeted Kenya, Burundi and Madagascar. This led to Kenya liberalizing the telecommunications gateway that saw the number of operators in the sector jump from 1 to 18 and in a short time-price of telecoms service dropped by 70% within a short time and this led to accelerated activity and growth. (

The continued construction of roads has led to growth in the building and construction sector. Some of these infrastructural projects include the expansion of Jomo-Kenyatta International Airport, construction of Mai-Mahiu-Narok road. Disbursement of funds by Kenya Roads Board to various road agencies went up in 2007 by 49.5% to stand at Kshs.15.4 billion from 10.3 billion in 2006.Cement consumption went up by 16.7 % to 2,061,400 tonnes in 2007 from 1,765,800 tonnes in 2006.Total wage employment in the sector stood at 81,799 persons in 2007 an increase of 2.4% from the previous year. This shows how the roads construction leads to economic growth because as roads are built, real estate industry grows and hence cement consumption goes up and at the same time employment is created. Other sectors that grow as a result of improved infrastructure due easy travelling and communication include tourism and industrial sector


The agricultural sector contributes about 25-30% of the overall Gross Domestic Product. Majority of the world’s poor live in the rural areas and depend upon agriculture for their livelihood. Agriculture is therefore critical for both economic development and poverty reduction. The contribution of agriculture to economic development lies in providing more food to the rapidly expanding population, increasing the demand for industrial products and thus necessitating expansion of the secondary and tertiary sectors, providing additional foreign earnings for the import of capital goods for development through increased agricultural exports, increasing rural incomes, providing productive employment and improving the welfare of rural people. Increased rural purchasing power caused by expansion of agricultural output and productivity will tend to raise the demand for manufactured goods and extend the size of the market and this will lead to the expansion of the industrial sector.

Despite the importance of agriculture, its full potential has not been realized due to low farm level productivity, poor marketing, limited access to credit and high cost of farm inputs.80% of Kenya is arid and semi-arid and sustainable agriculture can only be achieved through well planned and operated irrigation. However this requires a lot of money which the government cannot afford and hence is forced to turn to donors for support.

The government of Kenya has been receiving aid from various donors .In 2008,Kenya received Kshs.80 billion to alleviate food shortage. Food Agricultural Organization (FAO) donated 2.4 billion for the purchase of fertilizers, livestock feed and vaccine as well as purchase and develop new variety of seeds. World Food Program (WFP) funded the school feeding program to tune of 5.1 billion. Also a substantial amount of money has been directed to irrigation programs and construction of dams in parts of Ukambani and Turkana and has yielded results.

Agriculture has contributed to economic growth. For example, in 2006 the GDP expanded by 6.1% compared to 5.7% in 2005 in spite the drought that was experienced. The main sources of this growth were the Agriculture and Transport and Communication sectors. The production of maize grew by 11.8% to 36.1million bags in 2006 from 32.2 million bags in 2005.Coffee production recorded a significant increase of 6.9% to stand at 48.3 thousand tones up from 45.2 thousand tones in 2005(Kenya’s Economic Survey 2007).This in turn led to increased foreign earnings to Kenya and hence contributing to economic development as farmers increased their income thereby raising their living standards.


In this chapter we have examined the foreign aid extended to Kenya in the education, health, infrastructure and agricultural sectors and the resultant economic growth. The importance of foreign aid in economic development cannot be overlooked as this chapter has clearly shown that in 2002 the economy was growing at an average of 1.1% but after resumption of foreign aid, the economy by the end of 2007 was growing at an average of 7%.The heavy investment in education, health, agriculture and infrastructure sectors by the government and the donors has contributed to economic development as people can now access both education and health services more easily without any communication problems due to improved infrastructure. It is also important to note that foreign aid was complimented by sound governance and the fight against corruption together with strong political and social institutions. The economic growth decline in 2008 that saw the economic growth reduce to almost 2% was as a result of political instability brought about by the contested 2007 presidential election. This clearly shows that foreign aid must go hand in hand with conducive political and social environment.




In this study, the relationship between foreign aid and development has been carefully analyzed. In chapter one, the whole debate surrounding foreign aid has been captured through literature review and the Modernization and Dependency theories and it is through this analysis that modernization theory appears to be the one suitable for development. This is because it recognizes that developing countries lack capital and technology required for development hence foreign aid becomes the alternative. In chapter two, types and channels of foreign aid are discussed and what comes out clear is that tied aid is very dangerous to the growth of the recipient country. The chapters also capture the arguments for and against foreign aid and the advantages outweigh the disadvantages. Foreign aid can therefore be considered as necessary for development as it can help in starting up industries in developing countries.

Chapter three gives an overview of Kenya’s economic development since independence up to 2008 and what comes out clear is that the period from 2003 to 20007 experienced economic growth due to resumption of donor funding coupled with institutional reforms and fight against corruption. Chapter four specifically shows how much foreign aid has been advanced to education, health, infrastructure and agricultural sectors and the economic growth as a result of growth in these sectors. The chapter clearly shows that when foreign aid that is used efficiently it can indeed lead to rise in GDP since the economy rose from 2% growth in 2002 to 7.1% in 2007.


The role of foreign aid is characterized with disagreements, where on one side are the modernization theorists who argue that aid has indeed promoted growth and structural transformation in many developing countries. On the other side are critics who argue that aid does not promote faster growth but may in fact retard it. For example, by exacerbating developing country’s balance of payments deficits as a result of rising debt repayment obligations and the linking of aid to donor – country exports will retard their growth.

However, dissatisfaction on both sides creates the possibility of new arrangements characterized by greater congruence of interests and motivation on the part of the donor and the recipient. Aid from developed Nations that is geared more towards real development needs of recipients and permits them greater flexibility and autonomy in meeting their development priorities represents a positive step. In future aid should be linked to market reforms and the building of institutional capacities and more effective forms of governance. In addition, the more aid takes the form  of outright grants and concessional loans, the less it is tied to donor exports, the more autonomy is permitted in it’s allocation, and the more it is supplemented by the reduction of the donor country tariff and non-tariff trade barriers against LDC exports the greater will be it’s developmental impact.

Aid also cannot lead to development without being complimented by observance of human rights, access to quality education and affordable health care as well as a society free from political conflict. Any developing country must seek to ensure that there are stable and independent political and social institutions especially a credible electoral commission to provide peaceful and transparent political transition in order to ensure a conducive-environment for investment and economic development.


After critically assessing the role of foreign aid in economic development and the challenges that face the third world countries, a number of issues need to be looked at. Here are some of the recommendations that if implemented will help in making foreign aid more effective in bringing meaningful economic development. The recommendations are in no way exhaustive as development problems will vary from country to country.

First, the recipient countries should demand that aid be aligned with their development priorities. Donors should support country’s own strategies for growth and poverty reduction or equivalent national development plans and base their programs on the needs and priorities identified in these strategies.

Secondly, recipient countries should always demand for untied aid. Untying aid significantly increases its effectiveness. This means, not tying aid to donor exports and granting greater latitude to recipient countries to decide for themselves. For example, donor countries normally tie aid to purchases from their countries. This reduces the real worth of aid because it prevents the recipient from shopping around to find the goods they want from the cheapest markets. Untied aid hence will save the recipient money as they can buy where they like and spend less.

Thirdly, donor countries should ensure reliability in aid flows. Given the size of official flows relative to incomes of many countries, variations in these flows can cause problems. Volatile, unreliable aid flows can undermine budget management in recipient countries because in poor countries, aid shortfalls are usually offset by cutbacks in spending and sometimes by tax increases. Improving the reliability of aid is important to improving its effectiveness.

Fourthly, aid should be geared more towards the countries that undertake market reforms and the building of institutional capacities and more efficient forms of governance. Corruption must be eliminated as this is the greatest form of hindrance towards real development. The recipient countries should come up with Anti-Money laundering laws to prevent money stolen being stashed in foreign accounts.

Finally, the recipients of aid should improve their budgetary management and service delivery, strengthen institutions and improve on technology for efficiency in their operations. This will improve their absorptive capacity and hence can absorb more aid and put it into the intended use with efficiency and effectiveness.


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