How Effective Is International Aid and Assistance?

by John P. Ruehl     17 March 2024

On February 1, 2024, Ukraine secured a €50 billion aid package from the European Union (EU), aimed at bolstering its defense capabilities and facilitating the country’s reconstruction. Dozens of other countries, along with Western-dominated multilateral lenders like the International Monetary Foundation (IMF) and the World Bank, as well as private investors, have contributed billions of dollars in aid to Ukraine since Russia’s invasion in 2022. Billions more are pledged.

While international support has been crucial for Ukraine, Kyiv will be expected to pay much of this back. Approximately half the global population now live in countries where debt payments exceed spending on education and healthcare. While wealthier countries can manage debt sustainably, poorer countries face challenges in avoiding the detrimental effects of excessive debt, leading to stunted development.

Ukraine remains in desperate need of foreign financial assistance, humanitarian aid, infrastructure development, military support, and technical capacity building. However, quiet caution has emerged among various international supporters. Ukraine’s capacity to implement Western-backed political, economic, and corruption reforms, expel Russian forces, and repay loans is being questioned. The hesitation underscores the challenges of coordinating a diverse array of donors over time.

The EU has been the primary source of financial assistance for Ukraine, and the recent approval of its latest aid package followed months of debates between member states. The IMF also provided a $15.6 billion loan in 2023, marking the first IMF loan awarded to a country at war. Foreign investors have meanwhile increasingly sought guarantees and insurance for investing in Ukraine, with the Ukrainian government working with the World Bank to implement such policies.

The U.S. has provided the bulk of Ukraine’s foreign military aid, but the most recent $60 billion in military assistance has been stalled for months due to opposition in Congress. Republican support for Ukraine has declined markedly since the early days of the war, leading proponents of the pending military aid package to emphasize its benefits for U.S. companies, job creation, and reducing the maintenance costs of holding or destroying U.S. weapons stockpiles.

However, this line of thinking has ignited pushback from across the political spectrum. Republican politicians have become increasingly critical of providing Ukraine with a “blank check,” while accusations of potential money laundering have been raised. The lack of a long-term, bipartisan strategy toward Ukraine from Washington has left defense contractors hesitant to increase arms production, already under scrutiny for price-gouging during increased demand.

Adding to this reluctance is concern in the U.S. over establishing long-term outlets for defense contractors. For instance, since 1979, the U.S. has given Egypt roughly $50 billion in military aid, including fighter jets, helicopters, tanks, armored personnel carriers, surveillance aircraft, counterterrorism training, and border security assistance. After Congress canceled half of the annual payment of $1.2 billion to Egypt in 2013 following a military-led coup (as well as $250 million in annual economic aid), U.S. officials noted that the U.S. government would have to pay for the missed shipment and the costs of winding down the programs. Aid to Egypt was later fully reinstated in 2015,

Despite the resumption of military aid to Egypt, persistent questions surround the allocation of these funds. It has helped prevent Egypt from becoming adversarial, but Cairo has nevertheless grown closer to China and Russia since 2013. U.S. weapons manufacturers maintain lucrative export opportunities, but this assistance has also helped enrich and strengthen Egypt’s military and has empowered it to absorb other forms of foreign aid. The IMF’s conditions on giving Egypt a $3 billion loan in 2023 hinged on the military government’s commitment to political and economic reform, but this remains unlikely.

Egypt, with a debt of $11 billion, stands as the IMF’s second-largest debtor country, following Argentina ($32 billion) and ahead of Ukraine ($9 billion). The World Bank counts India ($39 billion), Indonesia ($19 billion), and Pakistan ($18 billion) as its top debtors. The combined global debt owed to the IMF and World Bank tops $300 billion, with their global reach having expanded significantly from their original focus on rebuilding Europe after World War II.

These organizations began large-scale crisis intervention in developing countries in the early 1980s to address their foreign debt challenges. As the U.S. raised interest rates to combat inflation, dollar-denominated loans caused significant defaults and debt restructuring, particularly across Latin America.

The IMF and the World Bank advocated for privatization of industries and export-driven industrialization, eliminating trade barriers and granting foreign corporations easier access to raw materials. Beginning in the 1980s, conditions associated with Structural Adjustment Programs (SAPs) saw economic growth return, but aid recipients became more market-dependent and reliant on the IMF and World Bank, while wages remained low through devalued currencies.

The end of the Cold War and the establishment of the modern global financial system saw credit-hungry governments shifting their reliance on countries and multilateral organizations to embrace private lenders, including private equity and venture capital.

The impact of broad lending strategies became evident in Pakistan’s loans in the Private Power Policy in 1994. The World Bank took a dominant role in the project, which provided guarantees, alongside the Asian Development Bank and the Export-Import Bank of Japan. The Benazir Bhutto government in Pakistan offered sovereign guarantees, attracting considerable foreign investment with assured, repatriable dollar-pegged returns.

However, changes in Pakistani governments altered the long-term political direction of the project, while local independent power producers (IPPs) engaged in price-gouging and an oversupply, plunging the country into debt. The World Bank was criticized, alongside Pakistani governments and IPPs, for a lack of oversight and the misappropriation of funds. Today, Pakistan faces acute energy shortages and its debt level has surged.

Pakistan can also rely on other sources of funding. Saudi lending to Pakistan goes back to the 1970s while China entered Pakistan’s debt market in the 2000s. Over the next few years, Pakistan will need to issue major repayments to Saudi Arabia, China, and private investors, which has led to standoffs over the issuing of additional loans and deciding whose, along with Western loans, get repaid first. This has raised concerns about the sustainability and strategic wisdom of Pakistan’s growing reliance on external debt.

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