To say that International Development Programs have come under intense scrutiny over the past few weeks would be quite an understatement. As someone who has worked on these programs, I can certainly understand the skepticism and questions concerning the value of many programs.
Before reviewing my involvement in these programs, let’s examine the different economic aid programs. There are many ways countries receive aid. Here are a few of them.
- Bilateral and Multilateral Aid: Bilateral aid is given directly from one country to another, such as many of the programs the U.S. provides to Israel. Multilateral aid comes from multiple countries and is distributed by organizations like the World Bank, the International Monetary Fund, and the United Nations. This type of aid is the most common I have witnessed.
- Humanitarian vs. Developmental Aid: Humanitarian aid provides immediate help during emergencies like natural disasters or wars. Developmental aid focuses on long-term improvements, including building infrastructure, developing financial markets, supporting education, and many other initiatives.
- Grants, Loans, and Technical Assistance: Grants are gifts of money that do not need to be repaid. Loans must be repaid under specific terms.
In many of the programs I have seen, the donors usually provide technical assistance to help the beneficiaries better understand and implement the technical aspects of the program’s terms of reference. This is where people like me come into play.
Some of the biggest organizations involved in economic aid include (or did) the U.S. Agency for International Development (USAID), the World Bank, the International Monetary Fund (IMF), the Asian Development Bank, the European Union (EU) and the United Nations Development Programme (UNDP). Non-governmental organizations (NGOs) and private businesses also play an important role.
My involvement includes working in sixteen countries providing technical assistance in economic development programs. My work primarily concerned developing the host country’s financial sector, particularly the commercial banking systems. My job was centered on helping countries better adhere to international standards and best practices. Most of these standards were rooted in the Basel Committee’s Core Principles for Effective Banking Supervision. My direct counterpart in these programs was the Governor of the Central Bank, who would be the equivalent of the Chairman of the Federal Reserve in the United States.
In implementing these various programs, I viewed my job as helping the host country develop a financial sector that was more transparent and better suited to promote economic growth in the private sector. During these various assignments, I quickly arrived at the following conclusion:
“A sound, efficient financial sector does not necessarily guarantee long-term growth, but long-term growth is difficult to achieve without a sound, efficient financial sector.”
Another key issue that I found lacking was trust. There was very little trust among the market participants in the banking sector. In my view, trust is key to promoting the growth of market-based financial intermediation. A high level of trust is required to encourage savers to place their money as deposits to financial institutions.
The fundamental theme of these countries was a deeply ingrained lack of trust. Both market participants and government authorities had undermined trust. I took the approach that any comprehensive strategy designed to enhance confidence in the banking sector will need to focus on four major themes:
- encouraging financial intermediation by improving the legal and accounting infrastructure for financial sector development. My thinking has always been that good decisions begin with good information. The legal and accounting are similar to sports. The legal aspect establishes the rules of the game to ensure everyone’s opportunities are the same, and the accounting aspect is how the score is kept,
- improving the current governance structure to make the lending and investment decisions taken by the banks to be more open and transparent,
- enhancing the effectiveness of bank regulation, bank operations, the licensing of new banks and the liquidation of distressed banks, and
- introducing new alternatives for businesses to access new and more reliable funding sources.
What Caused this Lack of Trust?
I quickly discovered that many banks I examined were never structured to serve the private sector. Rather, their lending was primarily targeted at insiders or other connected parties. We referred to them as pocket banks. The essential function of financial systems in market economies that was taking place in the developed world —to support the process of efficient resource allocation—was not being fulfilled because it was never intended to perform that function.
I realized that to build trust; special attention will need to be paid to maintaining the confidence of those providers of funds—the general public, who were generally provided with the least legal protection and information.
Looking at the various problems, I realized that throwing more money at the issue would not change the dynamics. Even though aid is meant to help, it often faces obstacles, including:
- Corruption and Mismanagement: In many cases, aid money is stolen or wasted, preventing it from reaching the people who needed it. I witnessed this in many of the countries where I worked.
- Dependency on Aid: Some countries rely too much on aid instead of working toward self-sufficiency. It reminded me of the adage: Give a man a fish, and he eats for a day. Teach him to fish, and he eats for the rest of his life.
- Political and Legal Barriers: Bureaucracy, unstable governments, and different laws can make it difficult to distribute aid effectively.
- Lack of Financial Oversight: Money can be stolen or misused without careful tracking.
How to Make Economic Aid More Effective – Here are some suggestions for ensuring financial aid is used correctly and efficiently:
- Public-Private Partnerships (PPPs): Working with private businesses to provide resources, technology, and expertise to make aid programs more successful. I have often suggested twinning programs. In a recent proposal I drafted, I suggested that the National Bank of Poland sign an agreement with the Central Bank of Ukraine to help transfer the knowledge needed to support the oversight of the financial markets.
- Financial Risk Management: Installing good controls to prevent fraud and follow on audits to ensure money is spent properly.
- Technology and Innovation: Using digital banking and artificial intelligence (AI) to track where aid money goes and reduce corruption.
- Capacity Building and Sustainable Development: Helping local communities build skills and infrastructure to grow without needing constant aid.
Economic aid is changing, with new approaches such as impact investing (investing in projects that create positive economic change) and results-based funding (giving money only when projects succeed).
I still believe that donors and the private sector can provide expertise, funding, and technology to make aid programs more efficient and ensure the intent to improve the economic conditions for people can be achieved. However, the goals and objectives of each program should be clearly understood by both the donor and the recipient.
Economic aid has the potential to change lives, but only if it is managed well. I felt that by focusing on fraud prevention, financial oversight, and governance in the financial sector, we would ensure that our efforts would benefit the group(s) that needed it the most, including the under-banked and non-banked sector of the general population.
Secretary Marco Rubio, if you read this, please feel free to contact me.
Prepared by Terry L. Stroud – March 2025
