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Chapter 14

Chapter 14

Foreign Aid

Norton Media Library

Dwight H. PerkinsSteven Radelet

David L. Lindauer

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Chapter 14: Learning Objectives

1. Some on foreign aid: definition, decomposition, the major donors and major recipients.

2.The controversies surrounding foreign aid including its motivations.

• 3. Three views on aid’s impact on growth and development.

4.The issue of conditionality & the future of foreign aid.

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1.Foreign Aid: Introduction

“I have long opposed foreign aid programs that have lined the pockets of corrupt dictators, while funding the salaries of a growing, bloated bureaucracy” ... US Senator Jesse Helms, 2002.

Diverse views on Aid: James Wolfenson –World Bank: There is need for more aid Senator Jesse Helms; no US aid should be given to any country.

Massive Historic Aid: Marshall Plan during WW led by USA- made a huge difference in European post-ww2 reconstruction

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Economist Views on Foreign Aid

Strong supporter: Jeffery Sachs and Joseph Stigltz

Others such as Chicago school conservative economists: do not care for more aid

Case massive Foreign Aid Failure in Africa

Congo/Zaire, Haiti, Zambia, etc

Case success: Botswana, Korea, Taiwan, Mozambique, Uganda, Tanzania.

There is mixed record of Aid effectiveness

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2.Donors & Recipient

• Foreign Aid comprises of financial flows, technical assistance, commodities given by one country to another.

• Two criteria: .

1.promote development and welfare- excluding military aid

2.Provided as a grant or a subsidized loan

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Who Gives Aid

Mostly Industrial Countries (OECD)

Government Agencies such as: USAID, SIDA. etc

World Bank, IMF, UNDP, Regional Banks

Marshall Plan: The US committed 1.5% of GDP about 10 times as much US aid today.

US official development assistance now is 0.16% of GDP.

Marshall plan was successful because of presence of skilled workforce, financial & legal institutions

• Search for Aid data…. Who gets Aid and who gives Aid

• Arab spring effect?

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The Commitment to Development Index: Ranking of quality of their Aid policies

Ranking of 21 richest countries by CDI criteria

1. Foreign aid quantity

2. Trade policies

3. Foreign Investment Policies

4. Environmental Policy

5. Security including peace keeping operations

6. Migration-ease of migration

7. Technology-support of Research & Development

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The Motivations for Aid: Why do nations give aid?

Foreign policy objectives & political alliances

Poverty reduction

Country size; Smaller states more aid

Look for commercial or trade ties

Enhancing Democracy??

Fighting Global Terrorism? Strategic aid.

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The Effect of Aid on Growth and Development

Generally, there are 4 Broad of Objectives of Aid

1. Stimulate economic growth through building infrastructure, supporting sectors such as agriculture, technology, new ideas

2. Strengthening education, health, political systems, environment

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3. Food aid and other commodities in case of emergencies and disaster

4. Economic Stabilization following natural or man-made shocks…

- Examples??

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Types of Aid

Emergency and humanitarian negatively associated with growth

• Aid that has effect over a long period of time- on health, education, democracy

Aid that directly affects growth inlcudes; roads, electricity, agricultural support, etc

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Q: Will aid really boosts growth?

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Aid, Growth, and Development

1. Stimulate economic growth: building infrastructure, supporting productive sectors: agriculture, new ideas, new tech

2. Other development objectives: education, health, environmental and political systems

3. Helping in natural disasters ad humanitarian crises

4. Help stabilizing economies after economic shocks

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Three Views of Aid- The AID debate

• View 1; On average Aid has a positive impact on economic development, but not always- especially on health, education,

• View 2: Has little or not effect may actually undermine growth and development. For example the effect of Food Aid may lower domestic food prices and displace local production,, Create Aid dependency

• View 3. The Effect is conditional depending on Good policies, institutions and Good Governance- Example Aid to Botswana and Korea has been effective.

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The relationship between the foreign aid received per capita in 131 developing countries during 2000-2005 and the rate of economic growth in those countries (2005-2010) as measured by the % increase in gross national income.

There is a noticeable negative correlation, that is, increased flows of foreign aid are associated with somewhat lower economic growth. While this does not prove that foreign aid actually impedes growth, it is powerful evidence that such aid does little or nothing to improve it.

http://www.forbes.com/sites/realspin/2012/09/25/4-6-trillion-later-foreign-aid-remains-an-economic-somnolent/

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By: WILLIAM EASTERLY

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Toward Aid Effectiveness

• Country Selectivity – Give aid to more democratic with good governance &least corruption

• Harmonize and coordinate better- several hundred aid missions are in Tanzania and Ethiopia

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• Result based management- allocate to projects that show results, modify existing programs, Learn from experience , better information

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Motivations & Objectives of Aid

to support foreign policy and political alliances,

to raise income levels and reduce poverty,,

to strengthen commercial ties,

to reward newly democratic countries.