Aid, Debt and economic development

Aid, Debt and economic development

AId?	Any assistance given to a country that would not have been provided through normal market forces. Reasons for aid- •       To help people who have experienced some form of natural disaster. •       To help developing countries achieve economic development. •       To create or strengthen political or strategic alliances. •       To fill the savings gap that exists in developing economies and so encourage investment. •       To improve the quality of the human resources in a developing country. •       To improve levels of technology. •       To fund specific development projects.
Humanitarian Aid	Aid given to alleviate short-term suffering which may be caused by events such as droughts, wars or natural disasters. Grant Aid- short term aid provided as a gift and does not have to be repaid. Food Aid- Provision of aid from donor countries or money to pay for food, which also includes money given for the transport, storage and distribution of food. Medical Aid- provision of medical services and provisions from donor countries, as well as money to facilitate medical services. Emergency Aid- the provision of emergency supplies including temporary shelters, tents, clothing, fuel, heating and lights
Development aid	Aid given in order to alleviate poverty in the long run and improve the welfare of individuals. Often provided on concessional terms but sometimes by as simple donations. Can be provided by individual countries, through their official aid agencies or through multilateral organizations such as the UN.
Types of development aid	Long-term loans- repayable by the developing country over a period of 10-20 years. –      Known as concessional or soft loans –      Have low rates of interest –      Are repayable in foreign currency, local currency or mixture of both –      Developing countries would prefer to have loans repayable in their local currencies. Tied Aid- Grants or loans given to a developing country with the condition that funds can only be used to buy goods/services from the donor country. Project Aid- Money given for a specific project in a country, often in the form of grant aid. –      Projects are often to improve infrastructure. –      One of the main suppliers of project aid to developing countries is the World Bank. Technical Assistance Aid- Sometimes included in project aid, tends to have to aims: –      To raise the level of technology in developing countries by bringing in foreign technology and technicians who can instruct in its use. –      To raise the quality of human capital by providing training facilities and expert guidance. *Foreign scholarships are also sometimes provided so managers and technicians can study abroad. •       Commodity Aid- Grant aid given by countries to increase productivity in developing countries. –      Provides funds to purchase commodities including consumer items, intermediate inputs and industrial raw materials. –      25% of aid commitments to Bangladesh take this form and provide necessary commodities such as: edible oils, seeds, fertilizer, chemicals, cement, steel, pumps & other equipment.
Concerns about Aid	research suggests: No significant correlation between level of aid and GDP growth. Meaning long-term aid to encourage development and reduce poverty is a normative economic concept In some developing countries the government in power may not have the welfare of the people at heart. So, when aid is received it goes to a small sector of the population, in many cases relatively wealthy city dwellers. In cases of extreme corruption, the aid often leaves the country almost as soon as it has come in. Tied aid is generally considered less effective than untied aid. The developing country is unable to “shop” for the least expensive goods/services and instead has to buy from the donor country. It doesn’t create any employment in the developing country because expenditure takes place in the donor country. Import may replace domestic products further harming domestic industries. Tied aid is viewed by some economists as being simply a subsidy to industries in the donor country. *Tied aid is now illegal in some countries such as the UK & is dropping in popularity. Continued dependence on aid may mean: There is little incentive to be innovative People develop a “welfare” mentality where they feel aid will always be there to help them. Some argue aid often focuses on the modern, industrial sector and may cause a greater gap in income and living standards than with those in the primary (agriculture) sector. Aid is often only available if the country agrees to adopt certain economic policies & these often reflect the policies suggested by the Washington Consensus. Emphasizing free market principles of liberalizations, deregulation and privatization to promote growth. These policies are often best suited for developed countries and MNCs rather than developing countries and their industries. There has been discussion that people in developed countries are beginning to suffer “aid weariness” & are beginning to think problems in their own economies are more important than problems in other countries. A reduction in the flow of aid may result. In the poorest countries, wars, corruption, lack of infrastructure and an illiterate and uneducated work force may make attracting private investment impossible. Directly targeted development aid, often from NGOs, may be the only viable option to achieve growth and development.
NGOs	Play a large role in international development. Difficult to generalize about because they are so diverse in terms of : –      Size, orientation, outlook, nationality, income & success. Priority: To promote economic development, humanitarian ideals and sustainable development. –      May seek long or short term improvement –      Examples: Oxfam, CARE, Mercy Corps, Cafod, Greenpeace, Amnesty International, Global 200, Doctors Without Borders Plan and implement specifically targeted projects in developing countries. Act as lobbyist to try to influence public policy in areas such as poverty reduction, workers’ rights, human rights & the environment.     *some NGOs do one or the other of these activities, others do both. NGOs that actively raise funds and awareness can result in public pressure on governments that might affect the amount of official aid given or the consumption patterns of the citizens that contribute to development. NGOs work directly in the field. They tend to develop a deep understanding of the issues and challenges faced by the poor. –      Particularly in comparison to official aid donors Much work by NGOs focuses on improving human capital: literacy programs, health education, AIDs prevention, agricultural micro credit schemes, immunizations, vocational training, etc. Many NGOs focus their attention on women
Indebtedness	A major barrier to growth & development is the need to repay debts on borrowed money. Before the 1970s the amount of borrowing by developing countries was low & tended to be in the form of bilateral official aid at concessionary interest rates.  (meaning?) In 1973, the world experienced an “oil shock” when OPEC steeply increased oil prices, causing the cost of production to increase dramatically worldwide, but also increasing oil revenues. Oil revenues earned by OPEC nations were then deposited into Western commercial banks Interest rates fell dramatically, making it “cheap and easy” to take a loan. Loaning the money was in fact, very important to the banks- so they could make profits. Because so much money was available (and traditional borrowers did not borrow all the available money) banks offered loans to developing countries. Developing countries borrowed money from Western banks, but at market rates (not soft rates) The loans were repayable in “hard currencies” (not the non-convertible currencies of most developing countries. Banks lent the money without monitoring what it was being used for & very little actually went into development projects. 20% of the money was spent on arms, some went into large infrastructure projects that failed & large amounts went into the bank accounts of dictators, generals and corrupt politicians. Developing nations were able to keep up debt repayments in hard currency through the 1970s –      high inflation –      low real world interest rates –      High world demand for commodities Then in 1979, OPEC raised prices again, increasing costs of production (transport), sending most of the world into a recession. World recession meant that the demand for commodities fell sharply & developing nations found it hard/impossible to repay loans. In 1972, Mexico defaulted, sending the international credit market into crisis. Several countries followed Mexico & the International Monetary Fund became instrumental in trying to solve what became to be known as the “Third World Debt Crisis” The IMF lent funds to countries that needed them but only under certain conditions. The conditions were known as “Structural Adjustment Policies” and included: •       Trade liberalization by lifting restrictions on imports/exports. •       Encouraging the exports of primary agricultural commodities called “cash crops”, and other commodities like minerals and metals. •       Devaluing currencies. •       Encouraging FDI •       Privatization of nationalized industry. •       Reducing government spending to ensure a balanced budget. •       “Austerity measures” reducing spending on social initiatives. •       Charging for basic services- education/health care •       Removing subsidies and price controls •       Improving governance & reducing corruption Criticism of the SAPs (Structural Adjustment Policies) §  Caused a reduction in government-provided services (education & health care) §  Increased unemployment §  Caused a fall in real wage levels §  Increased prices of essential products (as gov. subsides were taken away)  The result of the SAPs (Structural Adjustment Policies) was: A “de-development” of developing nations: o   Increased rates of malnutrition o   Declining school attendance rates o   Increasing infant mortality figures Although SAPs may lead to long-term growth; the short-term costs to the poor are very high. There is much international debate regarding the importance of debt relief. Many argue the debts of developing countries should be reduced or cancelled. Arguments in favor of debt relief: –      Reality: many developing countries have paid off the interest; but have barely touched the principal of their loans: o   Nigeria borrowed $17 billion, has paid back $18 billion so far and still owes $34 billion. It has been argued that this escalation of original debt is unfair. –      When governments are paying debts they are unable to spend money on other areas of the economy. This opportunity cost slows down growth & development. Malawi spends more on debt repayment than health