Aid and Development Flashcards
(32 cards)
Foreign Aid
a. bilateral - politically loaded
b. multilateral - to countries, and institutional organsisations (world bank, IMF etc) who have discretion to deliver that money under respective policies
c. private -
- Gov - budget support (usually a blank check given to a country)
- Military -
- Economic -
Bilateral aid (usually for political reasons) dwarfs multilateral (usually for rational, economic reason)
Research: global value cahign? where in a value chian a poor coutnry can contribute too the most and specialise in that. - find out more
Types of foreign aid: Classifications
- Grants - no conditions
2, Concessional Loans - have interest rate, but not from commercial bank
you end up in debt to countries that cant pay back due to development traps (list some)
Most are given to the poorest in the world, that are the least abl eto pay them back.
- Hard Commercial loans - given at mkt interest rates
- Loans by agencies (
- Projects
- Tech assistance (expert (foreign personnel, particularly used to train local personnel)
- particularly in countries with brain drain, low human capital. high skilled have incentive to leave - thus paid a very high international rate to keep key, small volume of people, working in the country. In the absence of those ppl, the country will struggle to function.
- Foreign expert paradigm - often little progress due to huge local political pushback. But incentive for foreign ‘expert’ is high as they are being paid ALOT. Means a lot of money for often little progress.
- Tied aid:
Japan - historically known for this.
Easy to inflate country’s aid statistics - good for international reputation
differing implications as to what the outcomes of expenditures will be (if you get loan, you want to invest in something productive to pay back the loan. If grant, more discretion, may lead to misuse if corruption is a leading issue.
difficult to aggregate
Western Model
Issues: quite opaque - giving money but you msut change law that is directly against the way yuo want to run yout country - limiting autonomy - creates dependency and difficult to establish independence
Chinese model: more transactional
Caused some friction with migration - increased social fractionalisation. Btut por is recipient countries get exactly what they agreed to.
-> useful for infrastructure projects, that will aid in the future development for the recipient country (and they don’t have to open markets, change policy)
greater willingness to work with country gov’s that western world might disagree with
Major way in which the western owrld is losing ifluence, as cina is increasongly becoming most aid receivers largest donors
Types of foreign aid: Practicals
ODA Net Disbursements
ODA: economic aid provided to others by members of OECD
global target for aid is 0.7%GDP
nordic nations are closets to 0.7%
ODA Net as % of GNI (Per person)
ODA by Region
Allocation of foreign aid only partly determined by relative need
where is the aid going - is it the poorest countries?
Argument for not giving aid to india
ODA by Income Group
Why Donors Give Aid
- Political and National security
* Most important consideration. Aid is generally
directed to “friendly nations”. - Economic Motivations: Two-Gap Models
* Savings Gap: The excess of domestic investment
opportunities over domestic savings, causing investments
to be limited by the available foreign exchange.
* Foreign Exchange Gap: The shortfall that results when
the planned trade deficit exceeds the value of capital
inflows, causing output growth to be limited by the
available foreign exchange for capital goods imports.
maintaining colonial ties -and huge amount of natural resources!!! - exploitative. for us, energy security is national security, thus were going to direct our aid into securing gnatural resources for energy
ie. aid is a vehicle for maintaining one’s power. whether it is covert or outright, it is the prevailing determinant of the nature of modern foreign aid. It is a tool of foreign policy.
ODA by Sector
as a direct result of aid , there has been dramatic and positive increases in health and education
Importance of Aid
aid oda fraction of gdp has declined over time, and fdi has increased over time
some countries refuse aid
lucas qcritique - k=capital should flow to poor countries but it doesn’t
almost no FDI in the world goes to poorer countries
Growth and Savings: The Hope and Reality
Assumed:
aid -> econ growth -> dom savings
Hope:
-> need for aid will disappear as dom resources are harnessed, thus making development ‘self sustaining’
Reality:
-> most aid not invested, and if it is, it is typically invested in low productivity projects. Why? “strings attached”
To make aid work, most directives for aid is nto to increase economic growth, it’s to restore a baseline std of living (ie. famine, hunger etc.) . I e. there is an argument that aid may be most productive when a country is approaching or at the poverty line (ie. all basic needs are met)
We see a lot less money going to production nowadays - theres been a reticence to give money to specific entities out of fear of aid dependency. (infant industry argument - disrupt free mkts by producing aid dependenct industries that are relient on foreigh aid - pop policies, industrial policies etc.)
To the contrary, the most productive countries in the last 30 years are the ones with robust production/industry policies -> makes them internationally competitive instead of laggards.
irony - bceause of great belief in mkts we dont target particularlies, but hte nations that have (forging their own way forward) have become internationally competetive by ignoring the advice of typical ‘foreign’ experts.
Although aid dependency exists, it does not mean we have to abandon production aid.
Absorptive Capacity
Rosenstein-Rodan (1961) :
Country’s ability to absorb capital use it in a productive way. * ‘Productive’ use of capital measured by positive ‘reasonable’rates of returns on total investment.
* ‘Absorptive capacity’ depends upon the level of income and
growth rate, supply of skill, level of average and marginal
rates of savings.
* If aid given on principle to ↑ capital formation in LDCs, then
more likely met by those LDCs where the marginal rates of
savings are much higher than the average.
* Absorptive capacity also depends upon infrastructure.
Why Countries Accept Aid
Economic
* Aid supplements scarce domestic resources
* Danger of corruption - not so much
Political
* Greater political leverages to favourite political leaders
* Also military aid etc.
Humanitarian
* E.g. natural disasters
Aid in Historical Perspective !!!!!!!!
50s - solow rostow world
aim: (+) GDP growth
role: aid for growth, resource transfers (harrod domar),
60s
aim: GDP growth, employment creation
role: big push
70s
aim: poverty and basic needs
(influence by marxists - neocolonial marxist theory)
focus: agriculture!!!, rural dev’t
80-95
aim: stabilisation and adjustment
structural adjustment (aid for macro adjustments and to support market forces)
aid conditionality
Washington consensus priorities - support for private sector and NGO’s
led to resentment between recipient countries and western donors - may be a precursor for countries like china arising from a completely different approach
assess ‘progress’ from aid
95 -
aim: growth and development
‘aid for trade’
good governance and aid effectiveness paradigm
country - led dev’t strategies PRSP (pov reduction strategy plan)
do a diagnosis of what is good and bad - very country specific
results based management
Fungability!! important to know, but don’t need to learn the diagram
- very difficult to stop aid fungability
- intention for money by donor is not entirely fulfilled by the recipietn
Aid Effectiveness
Mosley (1987)
* Aid seemingly effective at micro level
* NOT at macro level!
becuase - not all aid is given for growth. And if you do invest in growth producing projects (health and education), it will occure slowly over a long time. Thus lack if immediate growth effects does not mean its not working.
Analysis by Mosley: effects of aid on growth vary.
High aid/high growth: Mali, Egypt, Malawi, Syria, Lesotho, Yemen
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High aid/ low growth countries: Zaire, Somalia, Rwanda, Togo, Senegal, Sri Lanka
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Aid and Growth
Relationship foreign aid receipts and economic growth subject of countless studies since the 1950s
- Success of Marshall Plan, whereby in 1948 US foreign aid significantly contributed to the rebuilding of war-torn Europe.
*gave most aid to japan and Germany, which subsequently became two of hte largest economies in teh world - the return on investment is LARGE
*even with good intentions, aid can benefit the donor largely - Initial findings were optimistic (Papanek, 1972)
- Subsequent studies reached conflicting conclusions, with several notable cross country studies finding that aid, in fact, had a negative impact on growth (Griffin and Enos, 1970; Easterly, 1999).
Aid and Growth: Graph
Aid and Growth
-> Comparison of past aid with development outcomes shows a wide range of results
either no relationship, or slightly negative. But problem is that it looks at effect of aggregate aid on aggregate growth. but aid is typically directed specifically with intentions and geographically. So the impacts of aid are overlooked.
Often looking in ht period after the aid is received, instead of longitudinal analysis for longitudinal effects
(education, vaccination etc.)
- Simple regressions based on such data show a negative or insignificantly positive effect of aid on economic growth
- But maybe simple regressions are inadequate to test the relation between aid and growth?
- Or maybe aid can be effective in certain
environments only…?
Aid and Growth: total aid and econ growth
Different forms of aid have different effects on growth:
– what it is used for? (economic, social, food etc.) (eg. is military aid in ukraine going to increase economic growth in ukraine?)
– who gives it? (multilateral donors, bilateral donors, good donors, and others)
– whom it is given to? (those with good policies and institutions, and others)
– whom it is given to? (those in the tropics and outside)
– how long it takes to have effect?
(contemporaneous versus lagged)
Aid and Growth: 1st, 2nd and 2rd gen studies
“First generation studies:” few variables, single equations relating aid to savings.
“Second generation studies:” Many variables, several equations; relate aid to growth
“Third generation studies:” multiple equations; many countries, many years; many conditioning factors examined.
What determines the outcome of an aid and growth study?
You can predict the results of a paper from an author form the results of the papers they have previously written.
Ideology -
Author history
Institutional interests - who you work for ??
world bank producing lots of papers, all positive findings
Publication polishing
Aid and Growth: conglomerate opinion
Literature follows a cycle in which one paper finds a result, and is followed by another paper with a twist, either overturning or qualifying the previous result, followed by another, and so on
Has undesirable effects on policy with advocates selectively using results to bolster their preferred view on aid
Aid is not a robust determinant in growth!!!
If the projects were intended specifically for growth, then we will likely find growth. If not, we will likely not find growth - which is ok if it is not intended to cause growth.
regressions
This does not imply that aid does not work
- Maybe growth is measured with too large an error to have it
measurably affected by aid - Hardly any variable robustly affects growth (but some do)
- Maybe aid is given for other reasons?
- Maybe focusing on other targets is the way forward (?)
- Or increasing sample by focusing on regional data (?)
Arguments for Aid
- Means of achieving economic independence. - is this true? One of the reasons many european countries give aid is to maintain economic links. Intuitively, that is at odds with achieving independence.
- Morally essential to eliminate disparities in income distribution.
- Necessary to overcome deteriorating terms of trade.
- Reparations necessary for anti developmental policies in the colonial period. - has this ever happened? likely not.
- Allows LDCs to pay import repayments and supplement domestic savings - based on the supposition those saving sare going to be used to invest. But if investment isnt hapepning already, why would it happen all of a sudden if the reasons Inv is limited have not been resolved.
