Aid and Economic Development

1. A2 Macro – October 2012 Unit 4 Macro: Aid and Development

2. Development Aid Financial help given by richer countries to poorer ones to help their industrial and economic development

3. Different types of aid • Bi-lateral aid: From one country to another • Multi-lateral aid: Channelled through international bodies • Project aid: Direct financing of projects for a donor country • Technical assistance: Funding of expertise of various types • Humanitarian aid: Emergency disaster relief, food aid, refugee relief and disaster preparedness • Soft loans: A loan made to a country on a concessionary basis with a lower rate of interest • Tied aid: i.e. projects tied to suppliers in the donor country • Debt relief – e.g. cancellation, rescheduling, refinancing or re-organisation of a country’s external debts

7. UK Aid Data (2012)

10. UK Aid Data (2012) UK Bi-Lateral Aid Review 2011 1. Aid stopped to China and Russia 2. No new financial grant aid to India 3. UK will end direct financial support to South Africa by 2015 4. Part of the bilateral aid to Rwanda, Uganda and Malawi has been suspended.

15. Financial Flows Foreign (overseas) development aid Remittances from migrants Foreign direct investment (FDI) Portfolio capital investment Loans from international institutions

17. Remittances Private income transfers from migrants to family members in their home country Significance In 2011 remittances were at least 1% of GDP for1 08 countries; and 5% of GDP or more for 44 countries. For 22 countries, remittances represented 10 % or more of GDP

23. Scale of Financial Flows Aid and Private Capital Flows to Developing Countries 2010 Flows US$ billions % of total official and private flows Total Official Development Flows 128 10.9% Total Private Flows (including remittances) 1042 89.1% Foreign direct investment 509 43.5% Portfolio Investment 128 10.9% Net private long-term debt 84 7.2% Remittances 321 27.4%

24. Scale of Financial Flows Aid and Private Capital Flows to Developing Countries 2010 Flows US$ billions % of total official and private flows Total Official Development Flows 128 10.9% Total Private Flows (including remittances) 1042 89.1% Foreign direct investment 509 43.5% Portfolio Investment 128 10.9% Net private long-term debt 84 7.2% Remittances 321 27.4%

25. Building the Case for Overseas Aid Helps to overcome the savings gap + aid can be key in stabilising post-conflict environments and in disaster recovery e.g. Haiti Project aid can fast forward investment in critical infrastructure projects – capital deepening effects +higher productivity Long term aid for health and education projects - builds human capital and stronger social institutions. Aid projects for enterprise Well targeted aid might add around 0.5% to growth rate of poorest countries - this benefits donor countries too as trade grows Building a Case for Overseas Aid

29. Risks and Costs of Overseas Aid Poor governance - aid can be expropriated and leaves recipient country. Aid can finance corruption / strengths / “locks-in” ruling elites Lack of transparency – hundreds of $m spent on aid consultants and developed country NGOs – many donors forget cost of maintaining a pet capital project Dependency culture – one aid paradox is that aid tends to be most effective where it is needed least – it may stunt entrepreneurial culture Aid may lead to a distortion of market forces and a loss of economic efficiency and risks of inflation Some arguments against overseas aid

30. Angus Deaton on Aid • When the conditions for development are present, aid is not required. When they do not exist, aid is not useful and probably damaging • Foreign aid is antidemocratic because it frees local leaders from having to obtain the consent of the governed

32. Risks and Costs of Overseas Aid Poor governance - aid can be expropriated and leaves recipient country. Aid can finance corruption / strengths / “locks-in” ruling elites Lack of transparency – hundreds of $m spent on aid consultants and developed country NGOs – many donors forget the cost of maintaining a pet capital project Dependency culture – one aid paradox is that aid tends to be most effective where it is needed least – it may stunt entrepreneurial culture Aid may lead to a distortion of market forces and a loss of economic efficiency and risks of inflation Some arguments against overseas aid

34. Paul Collier on Aid “There is mounting cynicism about aid— some of it amply justified by past donor practices. Yet few realise just how smart and highly geared modern British aid can be. Perhaps the most sensational recent economic development in Africa has been the explosive growth of “branchless” telephone banking in Kenya. DfID thought up the idea, spent money successfully piloting it, and demonstrated to the private sector that there was a market opportunity. British aid was smart, and thereby catalytic.” Source: Prospect Magazine, 2010

35. Duflo and Banerjee – Poor Economics • Duflo and Banerjee – Economists at the Poverty Action Lab • Have pioneered use of randomised controlled trials to find out what works in development • Test efficacy of projects / interventions within a population – 2 or more groups (inc control) • “Top-down” aid projects afflicted by – Ideology (prejudices, beliefs) – Ignorance (info gaps about local conditions) – Inertia (failure to change when project does not work) “Precisely because [the poor] have so little, we often find them putting much careful thought into their choices: They have to be sophisticated economists just to survive.”

36. Dambisa Moyo – Dead Aid “I have long believed that far from being a catalyst, foreign aid has been the biggest single inhibitor of Africa's growth. Among its shortcomings, aid is correlated with corruption, fosters dependency, and invariably instils bureaucracy that hinders the emergence of an essential entrepreneurial class. For Africa to grow in a sustained way, foreign aid will have to be dramatically reduced over time, forcing countries to adopt more transparent strategies to finance development.” Source: Independent, March 2009

37. Moyo’s Tough Love Approach “In five years, all aid to Africa must stop. In its place, African nations will need to implement new policies including micro-loans, improved remittances and formalised domestic savings schemes, as well as, internationally, improving foreign direct investment, borrowing responsibly and securing more equitable trading arrangements with the west.” Source: Dambisa Moyo, Dead Aid

38. Aid Graduates Countries whose overseas aid as a share of GDP has declined over the years Country Maximum aid as % of GDP Year Minimum aid as % of GDP Year Growth of GDP per capita p.a. 1990–2010 Bangladesh 8.2% 1977 1.3% 2009 5.8% Botswana 31.6% 1966 0.5% 2005 7.1% China 0.7% 1992 0.01% 2008 11.6% Ghana 16.3% 2004 4.1% 2008 4.0% India 4.1% 1964 0.1% 2009 7.0% Kenya 16.8% 1993 6.1% 2008 3.1% Malaysia 1.2% 1987 0.07% 2009 6.1% Vietnam 5.9% 1992 2.9% 2008 7.4% Source: World Bank, Global Development Finance

39. Angus Deaton on Aid Alternatives • What should the West do instead of providing aid? – It can invest in finding a vaccine for malaria, still a mass killer. – It can push drug companies to tackle diseases that threaten poorer countries. – It can support the free flow of information about inventions and new management techniques. – It can relax trade barriers and provide poor countries with expert advice at the bargaining table. – It can ease immigration restraints and accept more newcomers. Is aid a roadblock to economic development?

40. Key Evaluation Arguments on Aid • Aid can bring economic, human, environmental benefits • Development can take place without aid • Well targeted aid can boost growth but the time lags can take years • Aid effectiveness boosted by: – Randomised control trials – Improve transparency of aid budgets – Conditionality linked to improved governance / democracy – Aid that stimulates and supports business enterprises e.g. M-PESA • Consider alternatives to direct aid – Debt forgiveness – Lowering trade barriers for the least developed countries

41. Breaking out of the aid cycle Sovereign Wealth Funds Micro-Credit and Insurance More equitable trade flows Formalised domestic savings Remittances from Diaspora Africans living abroad send more money home to their families than official development assistance by western aid donors. In 2010 the African diaspora remitted $51.8bn; in the same year ODA to Africa was $43bn. Source: FT, Oct 2013

42. Get help for unit 4 from fellow students, teachers and tutor2u on Twitter: #econ4 @tutor2u_econ 07/11/2014 08:53:30

Aid and Economic Development

Empfohlen

Empfohlen

Weitere ähnliche Inhalte

Was ist angesagt?

Was ist angesagt? (20)

Ähnlich wie Aid and Economic Development

Ähnlich wie Aid and Economic Development (20)

Mehr von tutor2u

Mehr von tutor2u (20)

Kürzlich hochgeladen

Kürzlich hochgeladen (20)

Aid and Economic Development