Chapter 14

Chapter 14

Foreign Aid

Norton Media Library

Dwight H. PerkinsSteven Radelet

David L. Lindauer

Test #4: November 20

• Chapters 14, 15, 16, 17

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.

Chapter 14: Summary Outline • Donors and Recipients

– What Is Foreign Aid? – Who Gives Aid? – Private Foreign Aid – Who Receives Foreign Aid? – The Motivations for Aid

• Aid, Growth, and Development – View 1. Although Not Always Successful, on Average, Aid Has a Positive

Impact on Economic Growth and Development – View 2. Aid Has Little or No Effect on Growth and Actually May Undermine

Growth – View 3. Aid Has a Conditional Relationship with Growth, Stimulating

Growth Only under Certain Circumstances, Such as in Countries with Good Policies or Institutions

• Donor Relationships with Recipient Countries – The Principal-Agent  Problem – Conditionality – Improving Aid Effectiveness

1.Foreign Aid: Introduction

• 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

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

2.Donors & Recipient

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

• Official definition of foreign aid is by Foreign Assistance Committee (DAC) or OECD-30 industrial countries

• Two criteria: promote development and welfare- excluding military aid

• Provided as a grant or a subsidized loan

Three Broad Categories of AIDAid Terminologies

• Official Development Assistance (ODA)-to Poor countries

• Official Assistance (OA) to richer states>$9000• Private Voluntary Assistance- includes grants

from NGOs, religious groups, charities, foundations, and private companies

• Bilateral aid; country to country for example US to Egypt

• Multi-lateral Aid from World Bank,UN, IMF to LDCs

Who Gives Aid

• Mostly Industrial Countries (OECD)• Government Agencies such as: USAID, SIDA. etc• World Bank, IMF, UNDP, Regional Banks

• Marshall Plan:( box14.1) 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

Net Official Development Assistance in 2004

• See figures 14.1 & 14.2 for absolute and relative figure.

• Which country gives the largest Aid in absolute terms? What about in percentage terms?

• Global Trends in ODA 1975-2003 (see figure 14.3

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• Ranking: Denmark #1, USA #12, Japan lower than US

Aid Recipients

• 150 Countries Received aid in 2003• Table 14.1 Shows list of recipients who

received more than $1 billion• Ethiopia & Tanzania are among the 10

states.• See Official Aid Receipts by region on table

14.2. What region receives the largest in absolute terms? What % of GDP?

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.

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

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

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

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

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, etc( Example eradicating river blindness (box 4.3 in West Africa), Malaria, HIV/Aids, etc

• 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 see figure 14.4; Create Aid dependency

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

Donor Relationships with Recipient Countries

• The Principal Agent Problem: Aid givers delegate agents which may not promote wishes of the donors especially in the presence of corruption. Who are the agents?

• Conditionality: You must do something to get aid. For example, you must liberalize prices and reduce defense expenditures, etc

• Improving Aid Effectiveness. How?

Toward Aid Effectiveness

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

• Promote participatory approach. How?• Harmonize and coordinate better- several

hundred aid missions are in Tanzania and Ethiopia• Result based management- allocate to projects

that show results, modify existing programs, Learn from experience , better information

Summary of Chapter 14• I. Foreign aid is a controversial topic with detractors from the right and left. The text

provides various examples to highlight the nature of the public debate. By definition, foreign aid consists of grants or subsidized loans. Aid then falls into three main categories: official development assistance (ODA), official assistance (OA), and private voluntary assistance (PVA). Aid may be pro vided bilaterally or multilaterally.

• The United States has been the biggest absolute donor, but when aid is expressed as a percentage of GDP, the United States becomes one of the smallest donors. In nominal terms, global ODA has increased steadily, but in real terms total ODA was less than the levels of the late 1980s and early 1990s. The largest multilateral agency is the World Bank, but many of its loans are not characterized as foreign aid. Likewise, the International Monetary Fund does not provide much foreign aid. Much of the recent increase in foreign aid has come from private sources.

• II. In calculating who receives foreign aid, different measures may be used. These include total aid, aid as a percentage of GNI, and aid per capita. Though these measures may differ, all three indicate that aid does not flow to the poor est countries.

• The motivations for aid may be summarized into five distinct objectives:•

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.

Summary contd.• III. Has aid helped growth and development? In order to wade through the literature,

the text suggests three viewpoints. In the first viewpoint, aid on average has a positive impact on economic growth and development. To sup port this stance, the text draws from recent examples on aid helping health, education, and the environment; providing humanitarian relief; and supporting economic and political stability.

• In the second view, aid has actually under mined growth. To illustrate this point, the authors employ the ideas of absorp tive capacity, aid crowding out tax revenue, and aid dependency.

• The third and final viewpoint is that aid has a conditional relationship with growth, helping countries with good policies or institutions. Much of the support for this viewpoint draws from recent empirical research, though the authors indicate the evidence is far from clear-cut.

• IV. Other aspects of foreign aid can be gleaned by analyzing donor relation ships with recipient countries. These relationships can be seen through the recent tool of principal-agent theory since much aid is provided through an indirect and distant relationship. The issue of conditionality lies at the heart of many donor interests, and the text points out that there are shortcomings to conditionality, namely that donors do not follow through on the conditions. The future of aid can be improved through aid effectiveness as in improving the selection of countries, having more recipient participation, increasing coordination among all donors, and basing aid on results.

Three Examples of the Effect of Foreign Aid:

There are three examples in the text. • The first describes the Marshall Plan as laying the

groundwork for future aid to developing countries. • The second illustrates the “Commitment to

Development” Index which rates developed countries on aspects other than giving aid.

• The third discusses a success case of aid, the cost-effective multilateral program that treated “river blindness” in 11 West African countries.

End Chapter 14

This concludes the Norton Media LibrarySlide Set for Chapter 14

W. W. Norton & CompanyIndependent and Employee-Owned

Economics ofDevelopment

SIXTH EDITION

ByDwight H. Perkins

Steven RadeletDavid L. Lindauer