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Chapter 32 Aid, debt, and economic development

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Henrik Karsberg

on 13 December 2013

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Transcript of Chapter 32 Aid, debt, and economic development

Chapter 32 Aid, debt, and economic development
Humanitarian aid
Humanitarian aid is given to alleviate short-term suffering, which may be caused by droughts, wars, or natural disasters.

Humanitarian aid is usually grant aid, also called gift aid and does not have to be repaid.

there are three main forms of grant aid, these are: 1 food aid, 2 medical aid, 3 emergency aid.
Classification of aid
1 Official aid
2 Unofficial aid
3 Bilateral aid, from one country to another directly.
4 Multilateral aid, given by rich countries to international aid agencies, such as the World Bank, United Nations and the International Monetary fund.
By the end of this chapter, you should know:
1 define development assistance (ODA)
2 define, explain, and give examples of different types of aid
3 distinguish between humanitarian and development aid
4 explain the motivations for giving aid
5 explain, give examples of, and evaluate concerns about aid
6 evaluate the effectiveness of aid in contributing to economic development
7 compare and contrast the roles of aid and trade in achieveing economic development
8 explain the role of NGOs in the development process
9 explain the current roles of the World Bank Group and the International Monetary Fund in promoting development
10 explain, give examples of, and evaluate the problems of indebtedness in developing countries

The definition of Aid
"Any assistance that is given to a country that would not have been provided through normal market forces".
Development aid
Development aid is given to alleviate poverty in the long run and improve the welfare of individuals.

Development aid is referred to as official Development Assistance (ODA)
Types of development aid
1 Long-term loans known as concessional or soft loans. Usually repayable over a long period of 10 to 20 years. Developing countries prefer loans that are payable in their own currency, foreign currency is scarce.

2 Tied aid is grants or loans that are given to developing countries on the conditions that they are used to buy goods and services from the donor country.

3 Project aid is money given for a specific project e.g.
infrastructure from the World Bank.

4 Technical assistance aid is to bring in foreign technology and technicians to raise the technical level of a country and to provide training facilities and expert guidance, sometimes also foreign scholarships.

5 Commodity aid is a grant to increase productivity in a country by providing funds to purchase commodities including consumer items.
The reasons for Aid
1 to help poor people who have experienced a natural disaster or war.
2 to help developing countries to achieve economic development.
3 to create or strengthen political or strategic alliances.
4 to fill the savings gap that exists in developing economies and so encourage investment.
5 to improve the quality of the human resources in a developing country.
6 to improve levels of technology.
7 to fund specific development projects
Concerns about aid
Non-government organizations
The International Monetary Fund (IMF)
A summary of the necessary conditions required for receiving debt relief
Data response exercises
1 Study the extract of the article on Tanzania on page 299 and answer the questions
2 Study the extracts on "Fighting poverty in Africa" on page 400, and answer the questions.
3 Answer the end of chapter review questions at the bottom of page 400.
The World Bank Group
It was estalished in 1945, with the main aim to provide aid and advice to developing countries and is a collection of five orgainizations.
1 The International Bank for Reconstruction and Development (IBRD)
2 The International Finance Corporation (IFC).
3 The International Development Association (IDA)
4 The Multilateral Investment Guarantee Agency (MIGA).
5 The International Centre for Settlements of Investment Disputes (ICSID).
Student Workpoint 32.2 p.390
Compare and contrast the extent, nature and sources of ODA to two economically less developed countries.

1 Select two countries with HDI index values below 0.5

2 www.oecd.org

3 "aid statistics, recipients aid charts"

4 select two countries

5 write a 500 word report

Research suggests that there is no significant correlation between the level of aid given to a developing country and the growth of GDP.

In many developing countries the government in power may not necessarily have the welfare of the majority of the population at heart. Aid often goes to a small sector of the population.

Aid is sometimes given for political reasons rather than being given to countries where the need is greatest.

The poorest people in the world recieve less aid than pople in middle income countries.

Tied aid is that the developing country has to buy from the donor country, which may be more expensive. Tied aid was made illegal in the UK in 2002.

Aid creates no employment or extra output in the developing country, since no expenditure takes place there. The imports may also replace domestic products, which may harm domestic industries.

Long term provision of large quantities of food may force down domestic prices and make matters worse for domestic farmers.

Continued dependency on aid may mean that there is little incentive to be innovative and that people develop a welfare mentality.

Aid is often only available if the country agrees to adopt certain economic policies, free market principles of liberalization, deregulation, and privatization.

The priority of NGOs is to promote economic development, humanitarian ideals, and sustainable development. E.g. Mercy Corps, Greenpeace, Amnesty International, Doctors Without Borders.

NGOs carry out two major activities: 1 They plan and implement specifically targeted projects in developing countries. 2 They act as lobbyists to try to influence public policy in areas such as poverty reduction, workers rights, human rights, and the environment.

NGOs work directly in the field in a variety of ways such as literacy programmes, health education, AIDS prevention projects, agricultural extension, micro-credit schemes, immunization and vocational training.
One of the major drawbacks to growth in development in developing countries is the level of debt repayments that these countries have to make on money that was borrowed previously.

The "third world debt crisis" started in 1973 when OPEC raised oil prices and revenues. "petro-dollars" was deposited in western commercial banks who lend them out to developing countries at high interest rates in hard currency. Little of the money was used for developing purposes. Instead money was spent on failing infrastructure projects, arms purchases, or stolen by dictators, generals and corrupt politicians.

High rates of inflation and high demand for their commodity exports in combination of high export prices enabled developing countries to earn enough revenue in hard currency to make their repayments.

in 1979 OPEC increased the oil price again which led to a world wide recession, with falling commodity prices. Developing countries could not service their debt called "third world debt crisis". e.g. Mexico.

IMF introduced "Structural Adjustment Policies" which means that they lent funds to developing countries if the adopted certain policies.
IMFs "Structural Adjustment Policies
1 Trade liberalization, lifting restrictions on imports and exports
2 encouraging export of primary agricultural commodities.
3 devaluing the currency
4 encouraging FDI
5 Privatization of nationalized industries
6 reducing government expenditure
7 austerity measures, reducing social expenditure
8 charging for basic services, such as education and health
9 removing subsidies and price controls
10 improving governance, the rpocess by which decisions are taken and policies are implemented, and reducing levels of corruption

"The IMF is an organization of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty".

The IMF responsibilities are:
1 Promoting international monetary cooperation
2 Facilitating the expansion and balanced growth of international trade.
3 Promoting exchange stability
4 Assisting in the establishment of a multilateral system of payments
5 Making its resources available to members experiencing balance of payments difficulties.

IMF uses surveillance, technical assistance, and financial assistance to meet its objectives.

IMF conducts an in-depth survey of each of its member countries and their economic performance

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