4.6 The Role Of Foreign Aid And Multilateral Development Assistance

Question 1

What is foreign aid?

Answer 1

Refers to assistance in the form of goods and services granted to LEDCs for the purpose of economic development. It is concessional and non commercial a gift rather than a loan. Foreign aids makes up for the shortcomings of the free market that fails to provide assistance to LEDCs during times of need.

Question 2

How can foreign aid be granted?

Answer 2

By government of donor countries or by non government organisations NGO. Donations by private individuals are usually made though an NGO. NGOs operate independent of any form of government often pursuing aims to improve social wellbeing.

Question 3

What is official development assistance ODA?

Answer 3

Foreign aid from donor government rather than from NGOs.

Question 4

What is humanitarian aid?

Answer 4

Refers to altruistic aid typically given to save lives and maintain human dignity in response to violence, natural disasters and national emergencies.

Question 5

What is development aid?

Answer 5

Foreign aid aimed at helping recipient countries to achieve their economic development objectives. Can be provided by individual countries, NGOs or by multilateral organisation such as the world bank. In general the priority of development aid from NGOs is to provide foreign aid on a small scale to help LEDCs to achieve development objectives.

Question 6

What aid does development aid include?

Answer 6

Grants - non repayable financial assistance provided by governments out grants are given to fund specific projects.
Concessional long term loans - know as soft loans these are loans with highly favourable conditions such as low interest rates and long repayment periods.
Project aid - foreign aid for specific developmental projects.
Programme aid - financial aid given to a specific industry.

Question 7

What is tied aid?

Answer 7

A financial assistance granted with conditions attached usually the need to spend the foreign aid on buying products from the donor country. Bilateral foreign aid is often a feature of tied aid.

Question 8

Why is tied aid criticised?

Answer 8

As the LEDCs requirement to buy goods and services forth donating country might not be appropriate. It is often received as an indirect subsidy for suppliers in the donor country. Hence tied aid can harm the competitiveness of LEDCs.

Question 9

What is an advantage of tied aid?

Answer 9

It ensures that financial aid is used for appropriate purposes whilst benefiting the donor country.

Question 10

What are the motivation for giving aid?

Answer 10

Humanitarian motives - aid provided for humanitarian reasons and given to achieve millennium development goals.
Economic motives - donors give ODA because it is in their financial interest to do so as this builds better economic ties with the recipient countries.
Political motives - Many countries have given ODA to their former colonies.

Question 11

What are advantages of foreign aid?

Answer 11

Without foreign aid many of the world poorest countries would struggle the ever get out of the poverty cycle. This there are both humanitarian and economic benefit to providing ODA.
Foreign aid in the form of ODA and concessionary long term loans can be used to increase the productive capacity of the LEDC thus helping it to achieve economic growth.
Foreign aid can help to reducer or eraitcaxte extreme poverty.
As a form of injection into the circular flow of income foreign aid can help to reduce inequalities and unemployment in the LEDC.

Question 12

What are disadvantages of friend aid?

Answer 12

Foreign aid in the form of loans imposes interest repayments so this adds to the financial burden of many LEDCs especially as debts have to be repaid in foreign currencies.
LEDCs tend to refer more favourable terms of international trade to help their economic development than outright foreign aid.
Most economists argue that economic development should be based on promoting free international trade such as increasing the export of LEDCs instead of relying on foreign aid. This is because ODA does not necessarily lead to development whereas trade does.

Question 13

What are further disadvantages of foreign aid?

Answer 13

Foreign aid can create economic dependence on donors from developed countries. This does not help the country to develop in the long run.
Corrupt governments in LEDCs often music’s foreign aid rather than passing on the funds to local projects that would benefit local industries and communities.
Mor often than not ODA is insufficient to really help LEDCs develop their economics.
The type of foreign aid given is not always appropriate. Foreign aid might also involved political interferences rather than direct economic benefits.

Question 14

What is multilateral development assistance?

Answer 14

Foreign aid delivered through international institutions such as the world banks and the international monetary fund IMF. These multinational institutions are international organisation made of member governments around the world. These member states pool resources together thus enabling large scale development programmes to be funded.

Question 15

What is a positive of multilateral development assistance?

Answer 15

Generally seen as a less political form of foreign aid than bilateral aid and tied aid as it encourages international cooperation rather than focusing on the financial interests of donor countries.

Question 16

What form of aid does multilateral development assistance take?

Answer 16

Often takes the form of non concessionary loans ie. lending that incurs interest and repayment periods determined by market forces. However this differs from commercial bank lending as the loans are specifically for development purposes.

Question 17

What is the role of the international monetary fund IMF?

Answer 17

An international multilateral financial institution set up in 1944 by 29 member countries. Its goal is to oversee the international financial system and to promote global monetary cooperation. Thus the IMF helps to facilitate sustainable economic growth and development.

Question 18

How does the IMF fulfil its role?

Answer 18

By assessing the economic policies of all member states in order to stabilise exchange rates and making short term non concessional loans to countries that experiences difficulties making their international payments.

Question 19

Why is the governance of the IMF often criticised?

Answer 19

Because the weather member states have a greater share of the voting rights. Thus the welfare of LEDCs and their development priorities are often overlooked.

Question 20

What is the role of the world bank?

Answer 20

The international organisation that lends money to LEDCs for economic development projects and structural change. The majority of loans are physical capital projects. It was set up in 1944 to provide foreign development assistance to low and middle income countries to reduce poverty and improve standard of living.

Question 21

What are the two international financial institutions that make up the world bank?

Answer 21

The international bank for reconstruction and development - provides loans to middle income countries so the funds are not technically classified as foreign aid. most of the lending from the world bank is made by the IBRD.
The international development association - member countries of the IDA offer concessionary interest free loans of up to 30 years to low incomes countries in order to reduce poverty.

Question 22

Why has the world bank been criticised?

Answer 22

For offering most of its lending to middle income countries rather than to LEDCs that face conditions of extreme poverty especially as its requirements for eligibility of dunning disqualify many poor and heavily indebted countries.