ISA, Grade 12 Economics Standard and Higher Level, March 2014

SECTION 4: DEVELOPMENT ECONOMICS4.6 The Roles of Foreign Aid and Multilateral Development

AssistanceWorksheet Foreign Aid and Multilateral development

assistance

Foreword to Development Co-operation Report 2013 (Ending Poverty), issued by the OEC, written by Angel Gurría,(OECD Secretary-General)

“Ending poverty is an international priority that cannot be put on the back burner. Although we have halved the proportion of people living in poverty, achieving the first Millennium Development Goal (MDG), our job is far from complete. Today, 1.2 billion people are still living in poverty……

….. Poverty does not stop at hunger; its effects are far reaching and go well beyond how much people eat and how much they earn. It is a multidimensional problem that impacts the well-being of citizens and the health of economies worldwide. It crosses local and national borders and, while it is prevalent, no society will function properly….

…. The geography of poverty has, and is, shifting with a growing quantity of people in middle-income countries, including India and China, living in poverty. The number and diversity of actors in development is increasing, global interdependencies are growing, and inequalities are on the rise despite periods of economic growth.

These trends call for broader measures that address poverty and development not only as a question of income, but also of inequality, sustainability, inclusiveness and well-being. These measures must be owned and led by countries, based on their respective development paths, priorities, capabilities and processes. This means revisiting our global development goals to ensure they respond to today’s needs and realities…..

…..There is no single solution. Ending poverty calls for the entire global community to work together – North-South, public and private sectors, civil society and foundations, and national, regional and local actors – to satisfy multiple and interlocking needs, demands and issues.

Also see:· Economics Course Companion 2nd edition, Jocelyn Blink & Ian Dorton, chapter 32,

Aid, debt and economic development, pages 385 - 389;

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Learning objectives classification and types of aid· Define the following terms: official development assistance (ODA), non-

governmental organisations (NGOs), humanitarian aid, food aid, medical aid, emergency relief aid, development aid, grants, concessional long-term loans, project aid, programme aid, tied aid, multilateral development assistance;

· Classify the different types of aid; · Know that aid which is extended to low-income countries by governments of donor

countries is called official development assistance (ODA); · Know that aid can also be given by non-governmental organisations (NGOs); · Explain that the main priority of NGOs is to provide aid on a small scale to achieve

development objectives; · Explain the different components of humanitarian aid which are food aid, medical aid

and emergency relief aid; · Explain that development aid consists of grants, concessional long-term loans, project

aid and programme aid; · Know that project aid includes support for schools and hospitals; · Know that programme aid includes support for sectors such as the education sector

and the financial sector; · Realise that aid can be both tied and untied aid; · Explain the reasons why higher income countries may give aid; · Compare and contrast (evaluate) the extent, nature and sources of ODA to two low

income countries;

Many different opinions exist about the role and impact of foreign aid. There are economists who feel that development aid is absolutely vital in encouraging faster and more equal economic growth and development worldwide. Others feel that aid has created a dependency on high income countries and caused many low income countries to find themselves in vicious cycles. For the purpose of your IB DP exam, you should be aware of these different opinions.

It will be especially important to be aware of the relative advantages of aid and trade. Increasingly more economists are now supporting the catch phrase ‘aid for trade’ rather than ‘aid, not trade’ or ‘trade, not aid’.

Peter Singer is an analyst who has pointed out that high income countries have an obligation to support low income countries in their efforts to fight absolute poverty. Jeffrey Sachs is another economist who strongly supports this view. Both support the UN’s commitment to development aid as defined as contributions which equal minimum 0.70% of a country’s GDP. Only a few countries currently meet this target. Paul Collier has also pointed out the importance of focused aid in his publications.

Other economists strongly oppose development aid. Supporters of this view include William Easterly and Dead Aid author Dambisa Moyo. To come to a balanced judgement you need to be aware of the arguments of both (extreme) sides.

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DIFFERENT TYPES OF AID

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AID

NGOS(UNOFFICIAL)

OFFICIAL DEVELOPMENT

ASSISTANCE

AID

BILATERAL MULTILATERAL

AID

TIED UNTIED

HUMANITARIAN AID (SR)

FOOD AID MEDICAL AIDEMERGENCY RELIEF

AID

DEVELOPMENTAID (LR)

GRANTS PROGRAMME AID

CONCESSIONAL LONG-

TERM LOANS

PROJECT AID

ARTICLE 1: Philippine Typhoon Haiyan survivors 'desperate' for aid

1. The official death toll stands at more than 2,000, though some reports say it could be as high as 10,000. The UN says more than 11 million people may have been affected and some 673,000 displaced.

2. Typhoon Haiyan - one of the most powerful storms ever recorded on land - hit the coastal Philippine provinces of Leyte and Samar on Friday. It swept through six central Philippine islands before going on to kill several people in Vietnam and southern China.

3. The president warned that storms like Haiyan were becoming more frequent, and there should be "no debate" that climate change was happening. He said either the world committed to action on climate change "or let us be prepared to meet disasters".

4. A congressman in Leyte told the BBC that the damage to Tacloban was "so massive in scale and so extensive in our areas that we literally would have to rebuild from scratch", he said, calling for greater co-ordination as aid to combat the rising "sense of hopelessness and desperation".

5. Relief operations are being stepped up, but damage to transport links and continuing bad weather have hindered aid distribution. The BBC's Jonathan Head in Tacloban says residents are becoming angry at the lack of progress and increasing breakdown in security. Planes are arriving at the airport, but bringing little in and only taking people out, and there is little sign of a co-ordinated relief operation, he says.

6. But Philippine Interior Minister Mar Roxas told the BBC that relief efforts were on track. "Our first priorities were, number one, to establish law and order; number two, to bring food and water to the people; and, number three, to recover the cadaver bags," he said.

7. "[Now] law and order has been stabilised, the supply of food and water is beginning - I'm not saying that we're anywhere near it - [but it] is beginning to be stabilised... and now we are concentrating on recovery of cadavers as well as on the distribution of the food and the relief that is coming in."

8. On Tuesday the UN launched an appeal for $301m (£190m) to help survivors. It has already released $25m to meet immediate needs. The UN Office for the Co-ordination of Humanitarian Affairs (OCHA) says 11.3 million people are in need of vital goods and services, because of factors such as lack of food, healthcare and access to education and livelihoods. US and British navy vessels are heading to the Philippines and several nations have pledged millions of dollars in aid.

Source: http://www.bbc.com/news/world-asia-24922492, published 13 November 2013, accessed 10 March 2014

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ARTICLE 2: Typhoon Haiyan survivors struggling to rebuild

1. Eighty-two-year-old Aquilina Capampangan sits on the low wall that is all that remains of the home she and her 84-year-old husband Francisco built for themselves 52 years ago. "Life is so difficult," she says. "If another storm comes, it will be very difficult for us to survive."

2. Like many others in the small coastal town of Daanbantayan and in the surrounding region - which lay in the path of "super typhoon" Haiyan as it tore across the central Philippines - the elderly couple emerged from a more substantial building in which they sheltered from the storm to find that their home for almost all their married life was a heap of metal sheets and pieces of wood. At least temporarily, some of these materials have been salvaged and turned into the small one-roomed shack they are now living in, alongside the site of their old home.

3. In and around Daanbantayan, many do seem to accept that for all the damage there has been - to homes, to schools and other public buildings and to fishing boats that are such a vital source of income - a worse fate was endured by those to the east where the typhoon made its landfall and whipped up the storm surge that brought a wall of water inland, particularly in the devastated town of Tacloban. It was in these more easterly regions that most of the casualties occurred. They now stand, according to government figures, at just over 6,000 dead and nearly 1,800 still missing.

4. But, as the aid operation moves increasingly from relief to recovery and reconstruction, it is the broader impact across the typhoon's path that defines the enormous challenges that lie ahead. Fourteen million people were affected altogether - some 40% of them, it is calculated, already living below the poverty line. More people were made homeless by Typhoon Haiyan - known in the Philippines as Typhoon Yolanda - than by the 2004 Indian Ocean tsunami.

5. Close to six million workers lost their sources of income, 30,000 boats were destroyed, millions of coconut trees were damaged or flattened and more than 1m tonnes of crops lost.

6. The aid agency Oxfam is sufficiently worried about the pace of recovery - and that places like northern Cebu have been overshadowed by the more visibly devastated Tacloban - that it is now putting 200 of its 500 or so emergency workers into its operations in this area. Oxfam is not alone in its concern that, for now, many people are starting to "build back worse", in a country that on average sees 20 typhoons a year. It believes this is a critical moment in the international response to the disaster and fears that the funding could begin to drop.

7. Tariq Riebl, Oxfam's Emergency Response Manager, has been in the region since the disaster. He cautions against being over-optimistic because the Philippines has a vibrant civil society with people who are very active in helping themselves in ways not necessarily seen in other countries hit by such disasters.

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8. "Maybe," he says, "there should be a new assessment of all the needs as this would bring to the forefront that there is a massive amount of work to be done and we are not talking about months here. We are talking about years that this is going to take for these areas to recover.

9. "I hear too many people talk about six months or 12 months. This is not the scale we are looking at. We are looking at three to five years or more."

10. At a school I visited, they have put up a temporary classroom to replace one that was badly damaged but are still waiting to repair damaged parts of the roof. Other schools had their roofs blown off, too.

11. Efforts are apparently being stepped up to relocate those who were living within 40m of the shore - on the grounds that they will then be less vulnerable in future typhoons.But there is a backlash from some local fishermen who say this will discriminate against them.

12. A local administrator, Felisa Osabel, told me the government needed to resolve the issue and wanted to make progress. But she acknowledged: "For the poor it is hard." And she undoubtedly spoke for many in this community when she said that from now on "with every single storm we will be afraid, always afraid".

Adapted after: http://www.bbc.com/news/world-asia-26088854, published 7 February 2014, written by Mike Wooldridge, accessed 10 March 2014

ARTICLE 3: How do disaster management and aid agencies plan ahead of disasters? The United Nations and major aid agencies have regional offices around the world which co-ordinate preparations for a disaster. "We're designed to be on standby in countries where it's likely to hit," Greg Barrow, a spokesman for the United Nations World Food Programme (WFP), told the BBC. Immediately after a disaster, the WFP sends in emergency teams to assess what the food needs are, how supplies can best be delivered, and how long the need is likely to continue. They also need to determine how capable the affected country is of responding, and whether its infrastructure is capable of handling such large quantities of aid and has safe places to store it. In the case of Typhoon Haiyan, the WFP has used its regional offices in Subang in Malaysia, while its relief items (high-energy biscuits, shelter, cooking equipment, medical supplies) have been brought in to the Philippines by chartered aircraft from Dubai.

What are the priorities after a disaster like Haiyan? "In situations like this, the government should take care of re-establishing lifelines - power, water, communications, and helping NGOs find where they should be," says Richard Gordon, adding that the first priority is water. "As the Red Cross, we've been distributing water, water tanks, thousands of ready-to-eat meals, medicine, shelter, blankets, generators, and inevitably body bags. We've given out satellite phones so that people can trace the missing. The sick are being treated on the spot or evacuated to neighbouring provinces." http://www.bbc.com/news/world-asia-24927349

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ASSIGNMENT 1The three above articles clearly show the difference between short and long-term foreign aid. Explain why type of aid would be most needed in the Philippines at this moment.

DIFFERENT TYPES OF AID· Bilateral aid – aid from one government to another.· Multilateral aid – aid is given to international aid agency deciding where the need is

greatest.· Grants – the aid is provided as a gift, with no repayment expected.· Concessional long-term loans: compared to loans from commercial banks or other

participants in financial markets, these loans will have a lower rate of interest rate and usually a longer pay-back period, sometimes also referred to as soft loans. Not only are concessional loans provided at far lower than market rates, but also for longer terms, and with conditions which allow grace periods for payments.

· Project aid – includes support for schools and hospitals· Programme aid – includes support for sectors such as the education sector or the financial

sector. · Soft loans – loans that are given at below-market rates of interest.· Official development assistance – aid administered by governments or government

agencies.· Unofficial aid – administered by a non-governmental body, such as a charity, where the

priority is to provide aid on a small scale to achieve development objectives. · Tied aid – the recipient country has to agree to buy goods or services from the donor

country with the provided aid.· Humanitarian aid – consists of food aid, medical aid and emergency relief aid. · Debt relief / cancellation · Mixed credits – High income countries lend low income countries funds for the purchase

of their exports at below-market prices. In effect, this is a mixture of a loan and an export subsidy.

Note that aid and trade are not the only two sources of income for countries. Other funds available to low income countries for growth and development include:

· foreign direct investment,· sale of natural resources (for example mining in DR Congo, oil in Nigeria, copper in

Peru) and privatisation of government services (such as water companies), · commercial loans (loans at market interest rates from a bank), · loans from international agencies such as the World Bank and the IMF, · remittances, · export revenues

Let’s have a closer look at remittances. Although these are not official development assistance and provided by one family member to another, these remittances can have a large impact on the standard of living of those who receive the remittance.

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ASSIGNMENT 2:Filipinos boost remittance sector growth in Hong Kong1. The Central business district of Hong Kong is always busy. But every Sunday, it is the

setting for thousands of the city's Filipino domestic workers gather to enjoy their day off. The neighbourhood comes alive with the sound of Tagalog, the first language of the Philippines. But they are not just coming together for social reasons.

2. Perlita Bruno, 47, has been making the familiar trip to World-Wide Plaza - a three-storey shopping mall in Central - for almost 20 years. At least one Sunday a month, the mother of two comes to send money to her family in the northern Philippines. She always saves and remits half her monthly salary of 6,000 Hong Kong dollars ($774; £464) from her job as a domestic helper. "I work here for my family, for my kids' education, so that they have a good life," Ms Bruno says, waiting in the queue at PNB Global. "Because we are very poor in the Philippines," she adds.

3. About 40 other remittance outfits operate in the shopping mall, The biggest difference between service providers is the exchange rate offered. Currently, one Hong Kong dollar buys about 5.6 Philippine pesos. The companies that offer stronger Hong Kong dollar rates will get more customers.

4. PNB Global is a remittance and financial company owned by the Manila-listed Philippine National Bank. It is one of a number of firms catering to the needs of more than 166,000 Filipino domestic helpers in Hong Kong. There are more than 10 million Filipino expatriates (10% of the population) - working outside their country.

5. They are commonly called OFWs - overseas Filipino workers - and their remittances are the biggest source of foreign exchange for the Philippines. The money they send home is a key driver of domestic consumption, which accounts for the bulk of economic activity in the sprawling archipelago. Last year, cash remittances hit a record high of $22.8bn, up 6.4% from 2012, and exceeding expectations of a 5% rise, according to the Bangko entral ng Pilipinas, the country's central bank.

Top remittance-receiving countries (source: PEW Research)Country Amount (Billions of US dollars)India 71.0China 60.2Philippines 26.1Mexico 22.0France 21.6

6. According to the Pew Research Center, remittances worldwide have nearly tripled since 2000 and fell only for one year after the global financial crisis of 2009. The top three sources of remittances were the US, Saudi Arabia and the UK, and globally the Philippines is the third largest recipient of remittances. India is the largest recipient with $71bn of money received, followed by China according to World Bank data.Adapted after: http://www.bbc.com/news/business-26318836, published 23 February 2014, accessed 10 March 2014, written by Juliana Liu

Question:

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How can (cash) remittance help a country to grow and develop?Abbreviated abstract from the Executive Summary of the same OECD Development Report ‘Ending Poverty’ (2013):The world has probably already met the MDG target of halving the share of the population living in extreme poverty (USD 1.25 per day). Yet progress towards the MDGs across countries, localities, population groups and gender has been uneven, reflecting a fundamental weakness in current approaches. As the United Nations and its partnersshape a new global framework to take the place of the MDGs in 2015, they face the urgent challenge of ending poverty once and for all. As this Development Co-operationReport (DCR) makes clear, this will take more than business as usual.

What is poverty and how is it measured?● Poverty is not only about income. The MDG goal to halve extreme income poverty sidesteps many other deprivations. Economic growth is not sufficient to eradicate all dimensions of poverty or to benefit all people.● Poor people do not only live in poor countries. Today, a new “bottom billion” live in middle-income countries, including India and China. National poverty measurements fail to capture these within-country inequalities or to guide progress in eradicating them● Poverty is not standard or static. New measures should look beyond global aggregates to reflect countries’ different starting points and challenges, address inequalities, and ensure comparability over time. ● At least half a billion people are entrenched in chronic poverty. Policies must be specially formulated not only to end extreme and chronic poverty, but to prevent newimpoverishment.

Achieving the end of poverty will require new policies, commitment and leadership by national governments – North and South – and the entire global community. Governments, parliamentarians, multilateral and regional institutions, civil society, non-governmental organisations (NGOs), foundations, and the private sector will need to co-operate to ensure that all polices in all areas work together to end poverty:● See development as a shift from poverty to power by empowering individuals, especially women and the chronically poor and eliminating social discrimination that keeps them poor. Development co-operation agencies, political movements and civil society organisations can support such power shifts ● Build inclusive and sustainable economies that enable the poorest to participate in and benefit from growth. This will require a re-orientation and reprioritisation of policies and programmes – especially in agriculture, education, energy and employment● Provide systems of social protection– employment guarantees, cash transfers, pensions, child and disability allowances – to create a virtuous cycle that enables poor people to sustain their livelihoods, build assets, access economic opportunities and withstand shocks such as climate change.● Make environmental sustainability and natural resources a core priority, inextricablylinked to poverty reduction and well-being. ● Support the exchange of knowledge and experience on poverty reduction, particularly

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among Southern countries What does this mean for development co-operation?· Extra support will be needed to meet these challenges. While financial resources

increasingly will come from countries’ own tax systems, official development assistance (ODA) will still be critical. It must become “smart” at attracting additional funds within a single, unified global structure that optimises all available sources of finance and ensures accountability

· The new Global Partnership for Effective Development Co-operation could catalyse and co-ordinate global efforts and resources.

· Eliminating poverty and reducing inequality, within and among countries, will require sustained and coherent support to fragile states; targeting of pockets of extreme poverty in middle-income countries;

· developing states’ own capacity for delivering public goods; and recognising that peace and the reduction of violence are the foundations of poverty eradication.

DATA RESPONSE 1

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Questions:a) Using the article, give an example of the following terms and define the term:

i. Food aidii. Emergency (relief) aid

iii. Bilateral aid.iv. Official Development Assistance (ODA)v. Programme aid

b) Explain the barriers which limit the effectiveness of foreign aid in Haiti.

c) Explain the motivations of Spain to give aid to Haiti.

d) With reference to Figure 1, explain why there is a difference between the Human Development Index (HDI) figures for Haiti and Madagascar.

e) Using information from the text / data and your knowledge of economics, evaluate aid as a means of achieving economic development in Haiti.

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ASSIGNMENT 3 (from the Development Cooperation Report 2013)

1. Explain what the number 718.0 on the table represents2. Explain what is expected to happen to extreme poverty in the next 2 decades.

ASSIGNMENT 4 (from the Development Cooperation Report 2013)

Questions:1. Which type of country receives the largest share of ODA?2. Give a reason why upper-middle income countries (UMICs) would ‘need’ to receive

ODA. 3. The share of ODA given to low and lower-middle income countries seems to have falling

since the late 1980s. Does this mean that these countries receive less ODA than before?4. What is meant by unallocated ODA?

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ASSIGNMENT 5

1. Explain to what extent this cartoon is still relevant in the world today.

ASSIGNMENT 6

1. When it comes to overseas aid, the British are hard-headed but not hard-hearted, David Cameron declared on July 19th 2011 in Nigeria. The line was in part a snappy soundbite. But it was also a plea, as voters rebel against the idea—popularised under the previous, Labour government but embraced by Mr Cameron—that Britain should become an “aid superpower”.

2. In Lagos, Mr Cameron painted a vision of British aid as a catalyst for economic growth. To reassure “aid sceptics” back home, who worry about money going astray, Britain will focus its cash on things that are “quantifiable and measurable”, such as campaigns to vaccinate millions of children, he vowed. The prime minister talked of unclogging regional and international trade with investments in new internet links, roads and more professional customs services. Yes, Britain should help the starving and those ravaged by war, drought and disease, he said; but growth, nurtured by free trade and political reforms, had the potential to wean Africa off aid altogether.

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Question:Explain Britain’s position of foreign aid.

ASSIGNMENT 7

1. Give reasons why ODA for economic and production sectors could have fallen.

ASSIGNMENT 6a) Define untied aid.b) Study the figure on the next page and explain the reasons for the trend in untying aid

in the 1995 -2010 period.

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UNTIED AID

Evidence has shown that the “tying” of aid - offering aid on the condition that it be used to procure goods or services from a specific country or region - can increase the costs of a development project by as much as 15-30%. In addition, the administration of tied aid requires larger bureaucracies in both the donor and recipient countries.

Untied aid avoids these unnecessary costs by giving recipient countries the freedom to use their aid to procure goods and services from virtually any country. From 1999-2001 to 2008, the proportion of untied bilateral aid rose progressively from 46% to 82%.

Source: http://www.oecd.org/dac/untied-aid/untyingaidisitworking.htm (accesed 04 March 2013)

SOME FACTS YOU NEED TO KNOW ABOUT ODA

· The Development Assistance Committee (DAC) consist out of Australia, Austria, Belgium, Greece, Iceland, Ireland, Italy, Poland, Portugal, Slovak Republic, Slovenia, Canada, Czech Republic, Denmark, EU, Finland, France, Japan, Korea, Luxembourg, The Netherlands, New Zealand, Spain, Sweden, Switzerland, UK, USA, Germany, Norway.

· The DAC defines ODA as “those flows to countries and territories on the DAC List (see further in this hand-out) of ODA Recipients and to multilateral institutions which are:

o provided by official agencies, including state and local governments, or by their executive agencies; and

o each transaction:i. is administered with the promotion of the economic development and welfare

of developing countries as its main objective; andii. is concessional in character and conveys a grant element of at least 25 per cent

(calculated at a rate of discount of 10 per cent).”

· In 2012, DAC members provided USD 125.9 billion in net ODA, representing 0.29% of their combined gross national income (GNI). This was a a drop of 3.9% in real terms compared to 2011. The financial crisis and euro zone turmoil led many governments to implement austerity measures and reduce their ODA budgets.

· In 2012, the largest donors by volume were USA, UK, Germany, France and Japan. Denmark, Luxembourg, the Netherlands, Norway and Sweden are the only five countries which exceed the UN ODA target of 0.7% of GNI. Among DAC members, G7 countries provided 70% if total net DAC ODA in 2012, a decrease from 75% in 2005. The DAC EU countries’ share (51%) is the lowest it has been since 2001.

· There is a shift noticeable in aid away from the poorest countries towards middle-income countries

· Country programmable aid (CPA) is a subset of total ODA. It is also known as “core” aid and represents the portion of aid donors programme for individual countries, and over

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which partner countries could have a significant say. CPA is defined through exclusions by subtracting from total gross bilateral ODA the following activities: that are inherently unpredictable (e.g. humanitarian aid and debt relief), entail no cross-border flows and do not form part of co-operation agreements between governments (e.g. food aid, core funding to NGOs)

· Untied aid is defined by DAC as loans and grants whose proceeds are fully and freely available to procurement (the purchase of goods and services by the government) from all OECD and partner countries. If this is not the case, then aid is tied (buy only from suppliers in the donor countries) or partially untied aid (procurement open to a restricted number of countries). The idea is that untied aid promotes cost-effective use of aid and promotes free and open trade. Multilateral aid is untied.

· DAC members are asked to screen their aid against the gender inequality marker.

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Let’s focus on one particular donor country: The Netherlands

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MILLENNIUM DEVELOPMENT GOALS

You should be aware of the current status of international development goals. The most important and influential are the Millennium Development Goals which will expire by 2015. The UN organisation has therefore started a very ambitious programme to develop new indicators of development and to set new goals. A data response question could report on the status of these MDGs. Please make sure that you know the goals by heart and if you want to read more about them, go to http://www.un.org/millenniumgoals/

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Aid can be given to different sectors and projects. After the Millennium Development Goals (MDG) were formulated, changes in the areas where aid was distributed has been clear.

Since 2002, Official Development Assistance (ODA) for health per capita/year in the WHO African Region has increased from US$ 2.7 to US$ 9.8 in 2010. Most of the increase has been however targeting MDG6, with all other health development priorities together receiving in 2010 less than 50% of the resources disbursed for MDG6. 768% is the increase of Official Development Assistance (ODA) disbursements for health from 2000 to 2010 and 58%of all ODA commitments for health were to combat HIV/AIDS, malaria and other diseases in 2009-2010

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On immunization, from the UNICEF website: Immunization is one of the most successful and cost-effective public health interventions. According to the latest data, in 2012, global efforts to immunize children with vaccines against life-threatening diseases reached 111 million children and averting an estimated 2 to 3 million deaths per year along with countless episodes of illness and disability.

However, despite significant gains in recent years, in 2012, some 22.6 million children of children under one year of age (almost 20% of children born each year) are not immunized, exposing them to disabilities or premature death. Among immunized children, more than 70% live in the 10 countries with the largest populations and the weakest immunization structures in the world.

Immunization has the potential to boost a country's growth. Immunization makes economic sense. Many analyses weighing the costs versus the benefits of vaccination have shown positive economic impact. What's more, the infrastructure, management and acceptability of immunization programmes offer a platform to deliver other health and nutrition interventions.

UNICEF and its partner organizations are responding to the challenge with a global push to ensure that the hardest children to reach – most of them in Africa and Asia – are immunized. Major initiatives are underway to accelerate the development and deployment of new and underused vaccines, for example hepatitis B (Hep B) and Haemophilus influenzae type b (Hib) vaccine. The number of countries using Hep B vaccine for infants has increased from 31 countries in 1992 to 181 in 2012 and for the Hib vaccine, has increased from 177 in 2011 to 184 in 2012

Significant progress has been made to reduce mortality and morbidity due to vaccine preventable diseases such as polio, measles and maternal and neonatal tetanus through supplementary immunization activities or campaigns, in addition to routine vaccination programmes. These campaigns provide valuable opportunities to reach children in older age groups compared to routine vaccination and to introduce other high-impact life-saving interventions such as vitamin A tablets, insecticide treated bed nets and de-worming tablets.

Achievements aside, there are daunting challenges in vaccinating all target children, not least of which is rising cost. Providing traditional and new vaccines can now cost as much as $20 to $40 per child. Other obstacles to higher coverage include non-availability of sustainable resources, poor management and logistics systems, inequity in services, and a lack of community engagement.

UNICEF works with governments, partners and communities to increase demand for immunization establish better cold chain and logistic systems. In addition, UNICEF, which currently supplies vaccines reaching 36% of the world's children, works with partners and manufacturers to obtain vaccines at affordable prices while maintaining a healthy market.

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ASSIGNMENT 7: PROGRAMME AID

Aid lifts Kenyan maize farmers’ fortunes

1. Tearing off long green leaves from a towering maize plant, Emily Nabwile Misiko offers them to her cow. Sitting under a tree beside her mud and dung hut in western Kenya, the animal is her prize possession – and proof that a new scheme to help the world’s poorest farmers is working.

2. Just last year, Ms Misiko grew the equivalent of five 90kg sacks of maize, the country’s staple, from her small half-acre plot. That was just about enough to feed her family of six for a year, but not enough to sell any surplus.

3. This year that has changed, thanks to a loan from charity One Acre Fund, whose work the Financial Times is highlighting as part of its inaugural Summer Charity Spotlight.

4. Ms Misiko made the most of new seeds, fertiliser and training to bring radical change to her farm: she more than doubled her crop to 12 bags and invested the proceeds from the sale of seven sacks into buying the cow.

5. “Before I used to scatter maize seeds and that was that,” says the 24-year old, sitting in the low light of her hut, as a chicken pecks its way around. Ms Misiko now plants seeds in carefully dug holes in rows, topped with fertiliser in individual mounds. The results have been so successful she hopes to take out new loans and rent an additional half acre to make the most of her flourishing harvests.

6. One Acre Fund, which also works in Rwanda and Burundi, says the inputs provided from a small annual $75 loan – enough for a three-quarter acre plot – will double output at a time when global supply is falling and prices rising. Its speedy take-up is impressive: from an initial 40 families in 2006, the group assists 130,000 farmers and wants to reach 1.5m by 2020.

7. The charity’s founder Andrew Youn, a 33-year-old former management consultant and Yale graduate believes that: ”seed, fertiliser and training kickstart this economic engine for people to earn their way out of poverty.”

8. The charity recoups about 85 per cent of its $14.1m field operation costs from farmers repaying $12.1m in loans, on which they pay about 17 per cent interest. It wants to make $20m in loans next year as it scales up.

9. To fund its ambitions, One Acre Fund is seeking loans from commercial banks, alongside soft loans and grants from development finance institutions and public support. Mr Youn says the money goes a long way: each loan can be lent twice in a year, thanks to two annual harvests, and provides collateral to raise money for a third loan, too.

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10. Not only does the group provide seeds, fertiliser and pesticide but each $75 package also provides sacks for storage, insurance, and, perhaps most important of all, training.

11. The poverty trap is not averted just yet, however. Rampant speculation means maize prices fluctuate wildly: low during harvest times and close to three times as high during the interim. Few smallholder farmers can afford to wait.

12. “If I didn’t have to pay school fees I could withhold my maize, but I have to sell it when prices are low to pay the fees,” says Mrs Simiyu.

13. Even so, the One Acre Fund approach is so successful some have even abandoned sugar cane, the region’s lacklustre cash crop.

14. “Sugar cane takes a longer time to mature and it doesn’t help our suffering with hunger,” says Esther Muricho, a 57-year-old mother of ten children. “Now I plant maize.”

Adapted after: The Financial Times, http://www.ft.com/intl/cms/s/0/662506c6-e642-11e1-bece-00144feab49a.html?ftcamp=published_links%2Frss%2Fworld%2Ffeed%2F%2Fproduct&ftcamp=crm/email/2012816/nbe/WorldNews/product#axzz23iZBYl7a, 15 August 2012, written by Katrina Manson.

Question:Explain the importance of strengthening the agricultural sector in Kenya.

ODA: TOTAL vs. % of GNI

Official Development Assistance (ODA) does not include private contributions or private capital flows and investments such as FDI or donations by private charities. The main objective of ODA is to promote growth and development. Pekka Hirvonen from the Global Policy Forum and author of “Stingy Samaritans; Why Recent Increases in Development Aid Fail to Help the Poor” states that recent increases [in foreign aid] do not tell the whole truth about rich countries’ generosity, or the lack of it. He feels that development assistance is often of dubious quality. He gives several reasons for this.

In many cases, aid is primarily designed to serve the strategic and economic interests of the donor countries or to benefit powerful domestic interest groups. It may be that aid systems are based on the interests of donors instead of the needs of recipients’ so that too little aid reaches countries that most desperately need it or is wasted on overpriced goods and services from donor countries.

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What is the 0.7% target?0.7 refers to the repeated commitment of the world's governments to commit 0.7% of high income-countries' gross national product (GNP) to Official Development Assistance. First pledged 35 years ago in a 1970 General Assembly Resolution, the 0.7 target has been affirmed in many international agreements over the years.

The UN Millennium Project's analysis indicates that 0.7% of rich world GNI can provide enough resources to meet Millennium Development Goals, but developed countries must follow through on commitments and begin increasing ODA volumes today. If every developed country set and followed through on a timetable to reach 0.7% by 2015, the world could make dramatic progress in the fight against poverty and start on a path to achieve the Millennium Development Goals and end extreme poverty within a generation. The core inputs to development—teachers, health centers, roads, wells, medicines, to name a few—are eminently affordable if rich and poor countries alike follow through on their commitments.

Source: accessed 04 march 2010 adapted after http://www.unmillenniumproject.org/press/07.htm#02

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ASSIGNMENT 8It could be that you get a data response question in which you will be asked to compare and contrast the extent, nature and sources of ODA to two economically less developed countries. Although it is impossible to predict whether this will be the type of data response question you will get and which two countries could be compared and contrasted, we could try to simulate this type of question. Compare and contrast Haiti and Pakistan using your own knowledge and the information which follows.

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The DAC1 List of ODA Recipients shows the countries and territories eligible to receive official development assistance (ODA). The DAC is the Development Assistance Committee of the OECD. The list consists of all low- and middle-income countries based on gross national income (GNI) per capita as published by the World Bank, with the exception of G8 members, European Union (EU) members and countries with a firm accession date for entry into the EU. The list also includes all of the Least Developed Countries (LDCs) as defined by the United Nations (UN).

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ISA, Grade 12 Economics Standard and Higher Level, March 2014

SECTION 4: DEVELOPMENT ECONOMICS4.6 The Roles of Foreign Aid and Multilateral Development

AssistanceWorksheet Foreign Aid and Multilateral development

assistance

Learning objectives evaluation of foreign aid· Evaluate the effectiveness of foreign aid in contributing to economic development; · Compare and contrast the roles of aid and trade in economic development;

Also see:· Economics Course Companion 2nd edition, Jocelyn Blink & Ian Dorton, chapter 32, Aid,

debt and economic development, pages 390 - 393;

You could be asked to evaluate foreign aid. To do this, you could be asked to compare and contrast the roles of aid and trade in economic development. See the points below:

Advantages of Trade (also see your notes from International Economics (section 3)) · Some “outward-oriented” countries have experience high rates of economic growth as a

result of their rapidly-expanding exports.· Trade enables countries to specialise in production in which the country has a

comparative or absolute advantage which makes the use of resources more efficient.· The Asian Tigers and Newly Industrialised countries (although not so ‘new’ anymore)

are real world examples of this strategy. In 1993, the World Bank published a report, entitled the ``East Asian Miracle,'' which identified eight countries that had achieved ``seemingly miraculous'' rates of sustained growth over the 25-year period from 1965 to 1990. The eight were Japan, the ``Four Tigers:'' Hongkong, South Korea, Singapore, and Taiwan; followed by the ``newly industrializing economies,'' now called ``emerging Tigers:'' Indonesia, Malaysia, and Thailand.

· Specialisation and producing for foreign markets can create economies of scale. · Trade can provide countries new export opportunities which could ceteris paribus

increase a country’s net exports, increase output and create additional jobs.· Exports can lead to an inflow of foreign currency.

Disadvantages of Trade· World trade is dominated by high income countries and MNCs (multinational

corporations). It is difficult for low income countries to enter the world market and compete against established exporting countries and MNCs. Trade blocs and tariffs create additional barriers for low-income countries in accessing international markets.

· Many low income countries depend heavily on the export of one or two often primary commodities and the importing of manufactured goods; deteriorating terms of trade have harmed both economic growth and development.

· When low income countries do attempt to industrialise/diversity, they often come up against trade barriers in high income countries. Recent trade talks by the WTO (Doha

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Development Round) clearly showed that regions like the EU and North America are not very keen to liberalise trade restrictions to favour new export countries.

· More trade liberalisation may not create “sustainable development”. High rates of economic growth as a result of rapidly-expanding exports, may not necessarily contribute to increased development. Income inequality may (initially) increase, production could cause large negative externalities and high levels of inflation may particularly hurt the purchasing power of the lower-income households.

· When low income countries specialise in the production of goods where they do have an absolute or comparative advantage, it may push them to produce low value-added goods. This limits the revenues from exports. Also low income elasticity of demand, and low price elasticity of both demand and supply may cause that the export revenues from goods are very unpredictable making it more difficult to generate a constant level of economic growth.

· The investment in infrastructure and capital stock needed to be able to successfully compete may (further) increase a country’s international debt or lead to opportunity costs in spending on other areas.

Arguments in favour of aidNote that you are to demonstrate knowledge of economic arguments for aid (political, moral and humanitarian arguments will not be rewarded heavily, but might contribute to a well rounded answer). The effectiveness of aid in creating growth and development depends heavily on the type of aid and development strategy but possible points which could be made are:

· lack of financial capital and expertise is a barrier to development which aid can fill.· the donor as well as receiver benefiting from higher income in the recipient country· aid could be used to bridge the “savings gap” and “investment gap” · fill the “technology gap” · can provide needed foreign exchange currency. · empirical evidence supports that NGO aid is successful in contributing towards

development.· aid (and especially aid for trade) could be used as a transition strategy · aid given to finance:

· provision of merit goods in recipient country· to finance imports of “appropriate” technology· to finance infrastructure projects in low-income countries (however, supporting non-

commercially viable projects may give benefits such as reducing unemployment whilst the project is being constructed. However when the development assistance is withdrawn the project may fail to stand on its own and either collapse or require additional funding).

Do you want to see advocates and adversaries of aid in action, then go to:· https://www.youtube.com/watch?v=INVMnknVHLU&list=PLB325301664E84EE0&index=3 · https://www.youtube.com/watch?v=eMGM-_Ifli0&list=PLB325301664E84EE0&index=2 · https://www.youtube.com/watch?v=av1FFB9M5uU&index=6&list=PL3E8055D35B1F4A5F · https://www.youtube.com/watch?v=HIPvlQOCfAQ&list=PL3E8055D35B1F4A5F · https://www.youtube.com/watch?v=yhiRYn6df9Q&list=PL3E8055D35B1F4A5F

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Arguments against aid· Aid has failed because of the poor economic policies adopted by recipient countries,

e.g. capital flight, corruption, government planners choosing more prestigious but less essential projects, finance of military expenditure and other misuse of aid

· Benefits of the aid might not go to the poor, but the middle income households. Inappropriate aid due to the demands of donor countries

· Foreign / Official Development Assistance may provide funding for production that the private sector might have invested in for commercial reasons and therefore pushes out private enterprise and initiatives.

· Could displace local producers, for example food aid is damaging to domestic farmers as they can’t compete with subsidised foreign prices.

· Interventions like aid tend to interfere with market forces, for example the transfer of low interest loans to fill the savings or foreign exchange gap will interfere in the market determination of interest rates and exchange rates.

· encourages reliance on “handouts” (dependency culture). This could ensure future dominance of donor countries.

· Foreign aid tends to focus on the modern commercial sector while the highest level of poverty can be found in rural, agricultural regions.

· Aid may build up resentment in the donor and recipient country. · Aid can add to a country’s debt and therefore cause debt service problems. · Bias towards urban areas increasing income inequalities and worsening rural-urban

migration.· Certain conditions attached to aid may include the implementation of free

market/supply side policies e.g. privatisation which may lead to de-development. · Empirical evidence seems to suggest that aid is often less effective than trade related

development, e.g. through fair trade schemes · Development has not always been the target of aid. In this case, it might be relevant

to discuss the benefits to donors of giving aid. These might include:o aid given to finance imports from donor countrieso aid given to pay for debt/aid which increases indebtedness to the donoro aid given to support political regimes sympathetic to donor countries o aid given to provide employment in the industries of the donor country or

to sell products from the donor country, e.g. construction contracts or military defence products

Did You Know?o About one billion people, one-sixth of the world's population, live on less

than $1 per day.o The U.S. currently spends $450 billion on its military, but only about $16

billion in official development assistance.o In Sub-Saharan Africa, more than 15 of every 100 children die before the

age of five. In western Kenya, fertilizer costs more than twice what it costs in France or the U.S. Ethiopia is so deforested that rural households cannot use manure as fertilizer because they need it as cooking fuel.

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o The rich countries have repeatedly promised to give $210 billion (0.7% of their incomes) in official development assistance, but only give $69 billion.

o Because of HIV/AIDS, life expectancy in crisis countries like Botswana has dropped to below 40 years.

o Millions of people, mostly children, die from malaria every year. For about $3 billion from the rich world, 2 million malaria deaths could be averted.

o $25 billion a year would be enough to deliver life-saving health services to the low-income countries. The U.S. has recently given $200 billion per year in tax cuts.

o Preliminary estimates show that the Millennium Development Goals can be met if foreign aid were increased by $75 billion per year, well within the promise of 0.7%.

Source: http://www.earth.columbia.edu/articles/view/1780 (accessed 8 April 2014)

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DATA RESPONSE 1 (M11/3/ECONO/HP3)Study the extract below and answer the questions that follow.

Is Africa too dependent on aid?

1. According to Zambian economist Dambisa Moyo, aid programmes have failed to improve the lives of most Africans and have created a damaging mutual dependence between donors and often corrupt governments. Moyo says that aid has done more harm than good in Africa.

2. For example in Zambia, the government has given up its responsibility for health care, turning much of its administration over to foreign donors. African countries too often suffer from a cycle of corruption, disease, poverty and aid-dependence. Educated young people have few opportunities. Moyo opposes assistance which is not targeted for particular uses, but supports emergency financial relief from the International Monetary Fund (IMF).

3. A former World Bank President defended aid programmes, praising the 12 to 15 African countries that are doing well, with several years of economic growth exceeding 6 %.

4. The president of The Centre for Development and Population Activities (CEDPA), says that the evidence just doesn’t support Moyo’s view. “Malawi, while still among the poorest countries in the world, has seen real progress because of strong cooperation between donor agencies, the government of Malawi, international organizations and local community groups.”

5. Over the past decade, investment in improving the lives of women and children in Malawi has paid off enormously. Child deaths have been reduced by nearly half (from 221 per thousand in 1990 to 120 per thousand in 2007); more children are going to school than ever before, and the number who complete primary school has doubled. Also, the number of women who are now using family planning services has more than tripled.

6. These real results should not be ignored when we look at aid effectiveness. The CEDPA president argues that Moyo is really looking at only one particular kind of aid: the transfer of financial resources to governments. Good aid involves more than money; it responds to locally-driven needs, includes technical assistance and institution building to strengthen efficient and honest public administration.

[Source: adapted from http://www.huffingtonpost.com/carol-peasley/is-aid-really-dead_b_189613.html, 21 April 2009 and “Zambian

Economist says Africa too dependent on aid”, http://www.voanews.com, 21 April 2009]

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(This question continues on the following page)

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Questions:

(a) Define the following terms indicated in bold in the text:(i) economic growth (paragraph 3)

[2 marks](ii) investment (paragraph 5).

[2 marks](b) Explain how foreign aid can help a country such as Malawi to

break out of a poverty cycle.[4 marks]

(c) Using a production possibility curve (PPC) diagram, explain why economic growth may not necessarily lead to economic development.

[4 marks]

(d) Using information from the text/data and your knowledge of economics, evaluate the effectiveness of different forms of aid in promoting economic development.

[8 marks]

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Trade for Aid InitiativeThe WTO Task Force concluded that aid for trade comprises the following categories: (a) technical assistance for trade policy and regulations (e.g. helping countries to develop trade strategies, negotiate trade agreements, and implement their outcomes); (b) trade-related infrastructure (e.g. building roads, ports, and telecommunications networks to connect domestic markets to the global economy);(c) productive capacity building, including trade development (e.g. supporting the private sector to exploit their comparative advantages and diversify their exports); (d) trade-related adjustment (e.g. helping developing countries with the costs associated with trade liberalisation, such as tariff reductions, preference erosion, or declining terms of trade); (e) other trade-related needs, if identified as trade-related development priorities in partner countries' national development strategies.Source: http://www.oecd.org/document/21/0,3746,en_2649_34665_43230357_1_1_1_1,00.html

Trade can be a powerful engine for economic growth and poverty reduction, but according to the OECD many developing countries may find it difficult to take advantage of all the benefits. This is particularly true for the least developed countries where there is often a lack of capacity – in terms of information, policies, procedures, institutions, and/or infrastructure – to integrate and compete effectively in global markets.

To address these barriers, the WTO has led the call for more and better aid for trade. In fact, aid for trade increased 62% in real terms between the 2002- 05 baseline period and 2008, with commitments in 2008 totalling USD 41.7 billion. Aid for trade can provide a short-term stimulus with long-term impacts on improving the ability of enterprises in low-income countries to respond to trade opportunities. Aid for trade bolsters the contribution of trade to economic growth and poverty reduction.

There is a large and growing body of evidence that there are positive links between openness to trade and economic performance. Steady reduction in trade barriers – particularly in manufactured goods – has enabled these countries to rapidly integrate into world markets through an export-led industrialisation process.Opening up trade regimes and enhancing market access is often not sufficient, however, to enable developing countries to participate and reap all the potential benefits of trade liberalisation. These countries need help in building their trade-related capacity if they are to benefit. There is no doubt that this may sometimes require painful structural adjustment.

Strengthening the linkages between trade and human development is very much part of the broader development agenda. In particular, this is an integral part of the global partnership for development mapped out by the Millennium Development Goals (goal number 8). Aid for trade underpins these objectives by strengthening the positive links between trade, economic growth and poverty reduction.Source: http://www.oecd.org/dataoecd/30/36/45581702.pdf

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DATA RESPONSE 2: TRADE NOT AID

1. The benefits of government aid or Official Development Assistance (ODA) have been questioned by successive Australian governments. The UN target for ODA is 0.7 % of GNP and Australia has budgeted US dollars ($) 1 billion in 2002-03 which represent 0.25 % of Australia’s GNP. In October 2002 the Minister for Foreign Affairs, Alexander Downer, argued that trade was the main factor and that “aid can only help to a small extent”.

2. The “trade not aid” policy is strangely out of touch with what the poorest countries need for both economic development and trade expansion. Most simply do not have the necessary resources. The United Nations Commission on Trade and Development says that in the 49 poorest Least Developed Countries (LDCs), between 1995 and 1999, the average per capita income was US ($) 0.72 and the average per capita consumption, was US ($) 0.57 a day… This would leave an average US ($) 0.15 per person per day to spend on private capital formation, public investment in infrastructure and the running of vital public services, including health, education, administration and law and order.

3. It is often claimed that trade brings much larger benefits to the poor than aid does. The problem with this claim is that the economic models used for trade policy analysis assume that poorer countries already have well-functioning markets for goods and services, a sound banking system, well-defined property rights, a skilled and healthy workforce, well-functioning legal and tax system and good infrastructure. But for many of the poorest countries these institutions are either not effective or non-existent, the human capital base is poor and the infrastructure is sadly deficient. Aid has a critical role in strengthening all these vital capacities.

4. Aid is essential to improve levels of education, sanitation and health to help the poorest countries escape from the poverty cycle and to build the skilled workforces needed to enable them to prosper. Without adequate investment in education, especially for women, countries risk becoming caught in a trap of low skills and low-quality products. Aid does work and it makes a huge difference to the lives of poor people. But aside from its obvious humanitarian benefits, aid should be considered an investment in our future, not a cost.

[Source: adapted from Action News, a World Vision publication, Autumn 2003]

(a) Define the following terms indicated in bold in the text:(i) infrastructure (paragraph 2) [2 marks](ii) poverty cycle (paragraph 4). [2 marks]

(b) Using an appropriate diagram(s), explain the difference between economic growth and development. [4 marks]

(c) Explain two reasons why increased investment in education is essential for development in developing economies. [4 marks]

(d) Using information from the text and your knowledge of economics, evaluate the view that increased trade is more important than increased aid for less developed economies.

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[8 marks]

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ISA, Grade 12 Economics Standard and Higher Level, March 2014

SECTION 4: DEVELOPMENT ECONOMICS4.6 The Roles of Foreign Aid and Multilateral Development

AssistanceWorksheet Foreign Aid and Multilateral development

assistance

Learning objectives multilateral development assistance · Know that the International Monetary Fund (IMF) and the World Bank (WB) provide

multilateral development assistance;· Examine the current roles of the IMF and WB in promoting economic development.

Also see:· Economics Course Companion 2nd edition, Jocelyn Blink & Ian Dorton, chapter 32,

Aid, debt and economic development, pages 394 - 398;

DATA RESPONSE 2IMF’s four steps to damnation

1. Robert Stiglitz, ex-chief economist of the World Bank, believes there are four steps which characterise structural assistance programmes:

2. Step One is privatization. Stiglitz points out that rather than objecting, some politicians happily sold their electricity and water companies. .You could see their eyes widen at the possibility of commissions for shaving a few billion off the sale price. US-backed power élites stripped Russia’s industrial assets, with the effect that national output was cut nearly in half.

3. Step Two is capital market liberalisation. In theory this allows investment capital to flow in and out. Unfortunately, as in Indonesia and Brazil, the money often simply flows out. And when that happens, to seduce speculators into returning a nation’s own capital funds, the IMF demands these nations substantially raise their interest rates. The result was predictable, said Stiglitz. Higher interest rates demolish property values, savage industrial production and drain national treasuries.

4. Step Three is market-based pricing. Essentially raising prices on food, water and cooking gas. This leads to Step-Three-and a- Half: what Stiglitz calls “the IMF riot”. The IMF riot is painfully predictable, as when the IMF eliminated food and fuel subsidies for the poor in Indonesia in 1998, Indonesia exploded into riots. The IMF riots cause new flights of capital and government bankruptcies. This economic arson has its bright side for foreigners, who can then pick off remaining assets at rock bottom prices.

5. A pattern emerges. There are lots of losers but the clear winners seem to be the western banks and US Treasury. Now we arrive at Step Four: free trade. Europeans and Americans today are kicking down barriers to sales in Asia, Latin America and Africa while barricading their own markets against the Third World’ s agriculture.

6. Stiglitz has two concerns about IMF and World Bank strategy. Firstly, it undermines democracy as the plans are devised in secrecy. Secondly, it does not work: for example,

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under the guiding hand of structural assistance, Africa’s income dropped by 23 %.[Source: Adapted from Gregory Palast, Observer, 29 April 2001]

Questions:a) With reference to the article, define the following terms highlighted in bold:

i. privatisation, ii. capital market liberalisation;

iii. subsidies;iv. capital flight;v. free trade.

[2 marks]

b) Using a supply and demand diagram, explain why market-based pricing may result in higher prices. [4 marks]

c) Using the article and your own knowledge of economics evaluate the view that the IMF and the World Bank policies are designed to further their interests of more developed countries at the expense of less developed countries. [8 marks]

Note:The term "Structural Adjustment Program" has gained such a negative connotation that the World Bank and IMF launched a new initiative, the Poverty Reduction Strategy Initiative. Countries are now to develop Poverty Reduction Strategy Papers (PRSP). While the name has changed, the World Bank and IMF are still forcing countries to adopt the same types of policies as SAPs.

World Bank’s ‘structural adjustment programmes’ often consisted of:· improved management public investments;· revised agricultural pricing policies (no longer maximum prices and guaranteed prices

producers);· revised industrial incentives;· reform of budget and tax system;· improvement of export incentives.

IMF’s ‘stabilisation programmes’ often consist of:· reduction of public sector / budget deficit;· devaluation of exchange rate;· liberalisation;· privatisation;· trade liberalisation;· creating more competition.

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The IMF and the World Bank

The IMF and the World Bank are sister institutions in the United Nations system. They share the same goal of raising living standards in their member countries. Their approaches to this goal are complementary, with the IMF focusing on ensuring the stability of the international financial system and the World Bank concentrating on long-term economic development and poverty reduction.

What are the purposes of the "Bretton Woods Institutions"?

The International Monetary Fund and the World Bank were both created at an international conference in Bretton Woods, New Hampshire, U.S.A. in July 1944. The goal of participants was to establish a framework for economic cooperation and development that would lead to a more stable and growing global economy.

The IMF (also called Fund) promotes international monetary cooperation and provides policy advice and technical assistance to help countries build and maintain strong economies. The Fund also makes loans and helps countries devise policy programs to solve balance of payments problems when sufficient financing on affordable terms cannot be found to meet international payments. IMF loans are relatively short term and funded mainly by the pool of quota contributions that members states provide.

The World Bank promotes long-term economic development and poverty reduction by providing technical and financial support to help countries reform particular sectors or implement specific projects—for example, building schools and health centres, providing water and electricity, fighting disease, and protecting the environment. World Bank assistance is generally long term and is funded both by member country contributions and through bond issuance.

How the Fund and Bank work together

The IMF and World Bank collaborate regularly and at many levels on assistance to member countries and are involved in several joint initiatives. The terms for their cooperation were set out in a concordat in 1989 to ensure effective collaboration in areas where responsibilities overlap.

IMF assessments of a country's general economic situation and policies provide input to the Bank's assessments of potential development projects or reforms. Similarly, Bank advice on structural and sectoral reforms is taken into account by the IMF in its policy advice. The staffs of the two institutions also cooperate when setting the conditions for their respective lending programs.

The Managing Director of the IMF and the President of the World Bank meet regularly to consult on major issues. They issue joint statements, occasionally write joint articles in the world press, and they have made joint visits to several regions and countries.

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During the 1990s, the IMF and World Bank together launched two major initiatives to help poor countries. In 1996, the organizations introduced the Heavily Indebted Poor Countries (HIPC) Initiative to reduce the external debt burdens of the most heavily indebted poor countries.

In 1999, the IMF and the World Bank initiated the Poverty Reduction Strategy Paper (PRSP) approach—a country-led strategy for linking national policies, donor support, and the development outcomes needed to reduce poverty in low-income countries. PRSPs underpin the HIPC Initiative and concessional lending by the IMF and World Bank.

In July 2004, the Fund and Bank launched the Global Monitoring Report (GMR). This annual report assesses progress on policies and actions needed to achieve the UN Millennium Development Goals (MDGs). The GMR also considers how well developing countries, developed countries, and the international financial institutions are contributing to the development partnership and strategy to meet the MDGs as reaffirmed at a summit in Monterrey in March 2002.

The IMF and World Bank are also working together to make financial sectors in member countries resilient and well regulated. The Financial Sector Assessment Program (FSAP) was introduced in 1999 to identify the strengths and vulnerabilities of a country's financial system and recommend the appropriate policy responses.

The IMF at a Glance

Fast Facts on the IMF

Membership: 186 countriesStaff: approximately 2,360 from 146 countries Total quotas: US$333 billion (as of 2/28/10)Additional pledged or committed resources: $600 billionLoans committed (as of 2/28/10): US$191 billion, of which US$121 billion have not been drawnBiggest borrowers (credit outstanding as of 2/28/10): Romania, Hungary, Ukraine

Original aims: Article I of the Articles of Agreement sets out the IMF’s main goals: promoting international monetary cooperation; facilitating the expansion and balanced growth of international trade; promoting exchange stability; assisting in the establishment of a multilateral system of payments; and making resources available (with adequate safeguards) to members experiencing

balance of payments difficulties

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The IMF’s responsibilities

The IMF's primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to buy goods and services from each other. Following the 2008 crisis, the Fund is clarifying and updating its mandate to cover the full range of macroeconomic and financial sector policies that bear on global stability.

Surveillance of economies

To maintain stability and prevent crises in the international monetary system, the IMF reviews national, regional, and global economic and financial developments through a formal system known as surveillance. The IMF provides advice to its 186 member countries, encouraging them to adopt policies that foster economic stability, reduce their vulnerability to economic and financial crises, and raise living standards.

Financial assistance

IMF financing is available to give member countries the breathing room they need to correct balance of payments problems. A policy program supported by IMF financing is designed by the national authorities in close cooperation with the IMF, and continued financial support is conditional on effective implementation of this program. To help support countries during the global economic crisis, the IMF has strengthened its lending capacity and has approved a major overhaul of how it lends money.

In low-income countries, the IMF provides financial support through its concessional lending facilities. The IMF has doubled loan access limits and is boosting its lending to the world’s poorer countries, with interest rates set at zero until 2012.

SDRs

The IMF issues an international reserve asset known as Special Drawing Rights that can supplement the official reserves of member countries. Two allocations in August and September 2009 increased the outstanding stock of SDRs almost ten-fold to total about SDR 204 billion (US$313 billion). Members can also voluntarily exchange SDRs for currencies among themselves.

Technical assistance

The IMF offers technical assistance and training to help member countries strengthen their capacity to design and implement effective policies. Technical assistance is offered in several areas, including tax policy and administration, expenditure management, monetary and exchange rate policies, banking and financial system supervision and regulation, legislative frameworks, and statistics.

Source: Factsheet The IMF at a Glance, 23 March 2010, http://www.imf.org/external/np/exr/facts/glance.htm (viewed 24 March 2010)

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Light-weight BRICS

Jun 6th 2011, 11:29 by The Economist online

How IMF voting shares compare with global economic heft

MANY argue that IMF vote-shares (and the amounts countries are required to put into the fund's kitty) should reflect countries' relative economic heft. At the moment, however, that is far from being the case. Taken together, the economies of the European Union countries amount to just under 24% of the global economy. The economies of Brazil, Russia, India, China and South Africa together make up about 21% of world GDP. But the European countries have 32% of the votes in the IMF, while the BRICS have 11%. No wonder the BRICS' representatives to the fund issued a rare joint statement deploring Europe's lock on the top job at the IMF, which is made possible in part by the fact that Europe and America between them have nearly 50%of the votes in the IMF's board. Proportionately, sub-Saharan Africa, (excluding South Africa) is the most over-represented region, with 3.1% of the vote but a mere 1.35% of the world economy.

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The IMF and the World Trade Organization

What objectives do the IMF and the WTO have in common?The IMF is an international organization of 186 countries that works to ensure the stability of the international monetary and financial system. The IMF’s mandate includes facilitating the expansion and balanced growth of international trade, promoting exchange stability, and providing the opportunity for the orderly correction of countries’ balance of payments problems. The IMF was established in 1945.

The WTO is an international organization of 153 members that deals with the rules of trade between nations. The WTO works to help international trade flow smoothly, predictably, and freely, and provides countries with a constructive and fair outlet for dealing with disputes over trade issues. The WTO came into being in 1995, succeeding the General Agreement on Tariffs and Trade (GATT) that was established in 1947.

The work of the IMF and the WTO is complementary. A sound international financial system is needed to support vibrant international trade, while smoothly flowing trade helps reduce the risk of payments imbalances and financial crisis. The two institutions work together to ensure a strong system of international trade and payments that is open to all countries. Such a system is critical for enabling economic growth, raising living standards, and reducing poverty around the globe.

How the IMF and the WTO work togetherThe IMF and the WTO work together on many levels, with the aim of ensuring greater coherence in global economic policymaking. A cooperation agreement between the two organizations, covering various aspects of their relationship, was signed shortly after the creation of the WTO.

The IMF has observer status in certain WTO bodies, and may participate actively in meetings of certain WTO committees and working groups. The WTO is required to consult the IMF when it deals with issues concerning monetary reserves, balance of payments, and foreign exchange arrangements. For example, WTO agreements allow countries to apply trade restrictions in the event of balance of payments difficulties. The WTO’s Balance of Payments Committee (BPC) bases its assessments of restrictions on the IMF’s determination of a member’s balance of payments situation.

Informal consultation between IMF staff and the WTO Secretariat takes place regularly regarding trade policy developments and advice for individual countries. The IMF and WTO also regularly share data and research.

It is likely that cooperation and consultation between the IMF and WTO will intensify, given the increased areas of mutual support and overlap between the two institutions. The Fund supports the multilateral trade reform efforts under the Doha Development Agenda.

Source: A Factsheet - March 2010, http://www.imf.org/external/np/exr/facts/imfwto.htm (viewed 24 march 2010)

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Evaluate the role of multilateral organizations like the World Bank and the IMF in assisting the economic development of Heavily Indebted Poor Countries.

Answers may include:· overview of the assistance provided by the IMF such as financial assistance to correct

balance of payment deficits or structural adjustment programmes· overview of the assistance provided by the World Bank such as offering

developmental assistance to middle and poor-income countries· evaluation of assistance provided to HIPC · evaluation of impact on economic growth· evaluation of impact on development such as income distribution, reduction of

absolute poverty, income distribution· evaluation of impact on human development such as literacy, life expectancy, HDI

progress· evaluation of macro impact on unemployment, inflation, exchange rate, fiscal and

monetary stability, saving, investment, role of government· evaluation of impact on balance of payments performance such as current account

and capital account · critical approach towards the IMF and the World Bank · any money received may often not get to the intended recipients because of

corruption

IMF Lending: When can a country borrow from the IMF?A member country may request IMF financial assistance if it has a balance of payments need when it cannot find sufficient financing on affordable terms to meet its net international payments while maintaining adequate reserve buffers going forward. An IMF loan eases the adjustment policies and reforms that a country must make to correct its balance of payments problem and restore conditions for strong economic growth.

The changing nature of IMF lendingThe volume of loans provided by the IMF has fluctuated significantly over time. The oil shock of the 1970s and the debt crisis of the 1980s were both followed by sharp increases in IMF lending. In the 1990s, the transition process in Central and Eastern Europe and the crises in emerging market economies led to further surges of demand for IMF resources. Deep crises in Latin America kept demand for IMF resources high in the early 2000s, but these loans were largely repaid as conditions improved. IMF lending rose again starting in late 2008, as a period of abundant capital flows and low pricing of risk gave way to global deleveraging in the wake of the financial crisis in advanced economies.

IMF Facilities Over the years, the IMF has developed various loan instruments, or “facilities”. Low-income countries may borrow at a concessional interest rate through the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF).Except for the PRGF and the ESF, all facilities are subject to the IMF’s market-related interest rate, known as the “rate of charge”.Source: http://www.imf.org/external/np/exr/facts/howlend.htm (published 9 September 2009, viewed 24 march 2010)

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About the World Bank

The term “world bank” was first used in reference to the International Bank for Reconstruction and Development (IBRD) in an article on the Bretton Woods conference in The Economist on July 22, 1944. The first meeting of the Boards of Governors of the IBRD and the International Monetary Fund—held in Savannah, Georgia, in March 1946—was officially called the “World Fund and Bank Inaugural Meeting.” And several news accounts of this conference, including one in The Washington Post, used the term “world bank.” What began as a nickname became official shorthand in 1975 for the IBRD and the International Development Association together.

The term "World Bank" refers only to the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The term "World Bank Group" incorporates five closely associated entities that work collaboratively toward poverty reduction: the World Bank (IBRD and IDA), and three other agencies, the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID).

The World Bank is like a cooperative in which 185 member countries are shareholders. Under the Articles of Agreement of the International Bank for Reconstruction and Development (IBRD), a country must first join the International Monetary Fund (IMF) prior to becoming a member of the Bank. Membership in IDA, IFC and MIGA is conditioned upon membership in IBRD.

According to the Articles of Agreement, the five largest shareholders, France, Germany, Japan, the United Kingdom and the United States, each appoint an executive director, while other member countries are represented by 19 executive directors who represent constituencies in several countries. Each of the directors is elected by a country or group of countries every two years. It is customary for election rules to ensure that a wide geographical balance is maintained on the board. The Bank president is nominated by the executive director of the largest shareholder in the bank, the United States. The president is elected by the board of governors for a five-year, renewable term. By a long-standing, informal agreement, the president of the bank is a United States national, while the managing director of the International Monetary Fund is a European.

The World Bank raises money in several different ways to support the low interest and no interest loans (credits) and grants that the World Bank (IBRD and IDA) offers to developing and poor countries. IBRD lending to developing countries is primarily financed by selling AAA-rated bonds in the world's financial markets. IBRD bonds are purchased by a wide range of private and institutional investors in North America, Europe and Asia.

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While IBRD earns a small margin on this lending, the greater proportion of income comes from lending out own capital. This capital consists of reserves built up over the years and money paid in from the bank's 185 member country shareholders. IBRD income also pays for World Bank operating expenses and has contributed to IDA and debt relief.

The World Bank often has a surplus at the end of the fiscal year, which is earned from the interest rates charged on some loans and from fees charged for some of our services. Some of the surplus goes to IDA—the part of the bank that provides grants and interest free loans to the world's poorest countries. The rest of the surplus is either used for debt relief for heavily indebted poor countries, added to financial reserves, or helps us respond to unforeseen humanitarian crises. Why is there still so much poverty after 60 years of the World Bank's existence? For the Bank, the bottom line is that there has been progress, but there has not been enough. The World Bank has stated to continue to do all they can to make sure successful projects and approaches are shared more widely so there's a greater impact on poverty reduction. At the same time, they claim to have learned from past mistakes and constantly work to improve our policies and programs. While poverty still exists, much progress has been made:· Over the past 40 years, life expectancy in developing countries has risen by 20 years-

about as much as was achieved in all of human history prior to the mid-20th century. · Over the past 30 years, adult illiteracy in the developing world has been nearly halved

to 25%. · Over the past 20 years, the absolute number of people living on less than one dollar a

day has begun to fall for the first time, even as the world's population has grown by 1.6 billion people.

· Over the last decade, growth in the developing world has outpaced that in developed countries, helping to provide jobs and boost revenues poor countries' governments need to provide essential services.

· The bank has assisted the nations of the former Soviet Union and Eastern Europe in developing their economies to the point at which a large group of these countries—Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia— qualified for and were admitted to membership in the European Union in 2004. Bulgaria and Romania joined in 2008 and Croatia is currently a candidate for membership.

· Part of the eradication of river blindness in 11 West African nations · Facilitated China’s entry into the global economy in the late 1970s and early 1980s

through advice and lending.· Helped India overcome famine in the 1960s through support for its “green

revolution,” which substantially increased the production of such crops as rice and wheat by introducing new strains of highyield seeds.

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Why has the World Bank made infrastructure a priority?Infrastructure is crucial for the development of any country. It is about delivering the essential services that people need to maintain a basic standard of living: water supply, sanitation, electricity, roads, and telecommunications, which in turn lead to improvements in health, access to education, and expanded economic opportunities. But for millions of people, these basic services are still beyond reach.

During the 1990s, the World Bank reduced its lending for infrastructure with the expectation that private sector investment in infrastructure would increase. However, the high cost of such investments prevented the private sector from stepping in.

Recognizing that infrastructure is a key element in a country’s economic growth, which in turn greatly affects poverty reduction, the Bank has begun to take on new infrastructure projects. Like the rest of the development community, the Bank realizes that infrastructure services are important to reach the Millennium Development Goals.

Why is there so much criticism of the World Bank? According to the World Bank website: “Our role in development and in the wider globalization of the world's economy has often been misunderstood. On one hand, this occurred because we did not explain the Bank's mission or our work very well. On the other, critics tried to blame the bank for any or all of the perceived problems associated with globalization-the growing integration of economies and societies around the world resulting from increased flows of goods, services, capital, technology, and ideas-an economic force that the World Bank does not control. Also, protests drew worldwide attention to the problem of extremely high multilateral debt levels carried by very poor countries, which high income countries ultimately agreed were unsustainable and stifled the ability of poor countries to both pay those debts and combat poverty. This led the World Bank and International Monetary Fund to form the Debt Initiative for Heavily Indebted Poor Countries (HIPC) and to further financial pledges by high income countries to assist the World Bank to carry out debt relief efforts for heavily indebted poor countries.

Our mission is to help developing countries and their people reach the goals by working with our partners to alleviate poverty. To do that we concentrate on building the climate for investment, jobs and sustainable growth, so that economies will grow, and by investing in and empowering poor people to participate in development.”

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Find below useful points to consider in an answering evaluation questions asking you to compare and contrast the roles of aid and trade in economic growth and development.

You must be able to explain the concept of “development. It is not sufficient to simply define development. You need to clearly demonstrate how the points you explain can actually contribute to development. The better responses will distinguish between the effect of aid / trade on growth and the effect of aid / trade on development.

You should be able to explain whether the asked for strategy (aid, trade, import substitution, export promotion (export-led growth), trade liberalization, interventionist policies and / or market-oriented policies) is the most effective way to bring about development versus other ways of achieving development (e.g. trade vs. aid).

Better responses will discriminate between the effects of different types of aid. The impact of humanitarian aid can not be compared with the effects of project aid or programme aid.

In the case of aid, you might want to investigate the different effects on the donor and the recipient country. To be aware of real-world examples will strengthen your answer. The news sections of the IMF, World Bank or UN websites can provide you with useful information.

Assistance from other countries can enable countries to improve their infrastructure, stock of capital goods, education and health care. However, aid is not always given appropriately and will not raise living standards in that case. An example might be to provide capital for high-technology equipment to a very poor and overpopulated agricultural country. The technology and trained labour force required to use this equipment may not exist. Capital which takes advantage of the comparative advantages of this country (climate, natural resources, labour intensive production) are likely to have a larger effect.

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