Aid, debt and economic development

IB Econ Chapter 32

What is Aid? Foreign Aid is any assistance that is given

to a country that would not have been provided through normal market forces

It is likely to be given for a number of reasons After a natural disaster or war To help achieve economic development To strengthen or create strategic alliances To fill the savings gap and encourage

investment To improve the quality of human resources To improve levels of technology To fund specific development projects

Aid can be given by government agencies or NGO’s (non government organisations

There are two main types of aid Humanitarian Aid and Development Aid

Humanitarian Aid This is aid given to

alleviate short term suffering due to droughts, wars, or natural disasters

It can be described as grant aid; it is short term provided as a gift and does not have to be paid back

The three main forms are Food aid Medical aid Emergency aid e.g.

temporary shelters, tents, clothing, fuel, heating and lighting

Development Aid This type of aid is given in order to

alleviate poverty in the long run and improve the welfare of individuals

It is sometime referred to as ODA – Official Development Assistance

There is a committee called the Development Assistance Committee (DAC) which organises development aid for the OECD countries

In the 1970s the UN general assembly agreed that developed nations would aim to spend 0.7% of GNI on development aid although many are still far from this target

In 1970, The 0.7% ODA/GNI target was first agreed and has been repeatedly re-endorsed at the highest level at international aid and development conferencesIn 2005, the 15 countries that were members of the European Union by 2004 agreed to reach the target by 2015

Of the 15 only Denmark,Luxembourg, Netherlands, Norway and Sweden havehit the targetThe US is one of the worst at 0.2%

Types of Development Aid Long term loans

Payable over 10 to 20 years Very low interest rate

Tied aid Grants or loans given on the condition that funds

are used to buy goods and services from the donor country

Project aid Given for a specific project Often given as grant aid (no repayment necessary) Projects are often to improve infrastructure The World Bank is one of the main suppliers of

project aid Technical Assistance Aid

Aims to raise the level of technology (foreign technology and technicians are sent to developing country)

Aims also to raise quality of human capital Foreign scholarships may be given too

Commodity Aid E.g. edible oils, seeds, fertiliser, chemicals, cement,

steel, pumps and other equipment

Bilateral aid is aid given directly by one country to anotherMultilateral aid is aid given by rich countries to international aid agencies who then decide where the aid is most needed

Research time:Complete Student Workpoint 32.2

Concerns about Aid (Evaluation) While it is generally agreed that humanitarian aid is

necessary to relieve short term suffering there is a question mark over development aid and there seems to be no significant correlation between aid and development

Corruption may mean that aid does not reach those that need it

It is often argued that developed countries give aid to those of political or economic interest to them Japan gave 617 million yen to St Kitts and Nevis and

US$17 million to Nicaragua Both voted with Japan to end the whaling ban

It is generally agreed that tied aid is not as effective as untied aid The developing country may have to buy more

expensive goods and services from the donor country It creates no employment or extra output in the

developing country Imports may replace domestic goods and further

damage employment The UK made tied aid illegal in June 2002

Concerns about Aid (Evaluation) Continued dependency on aid may mean that

there is little incentive to be innovative and people may develop a welfare mentality

Some believe that aid is focused too heavily on the industrialised sector which cause an income gap between those in that sector and the traditional agricultural sector

Aid is often only available if the country agree to certain economic policies which emphasise free market principles (reflecting the Washington consensus) which might be not be in the best interest of the developing country

People in developed countries (particularly in times of recession) are beginning to suffer from aid weariness They think that their economic problems are

more important than aiding developing countries which leads to a reduction in the flows of aid

Complete Q1,2 and 3 P400

Research/DebateShould developed countries help poor, third world nations without expecting debt repayment?Individually do some researchFeed your findings back to your team leaderTogether create your argument(use real life examples to back your arguments