Transcript PerkinsEcoDev6eCH14

Norton Media Library
Chapter 14
Foreign Aid
Dwight H. Perkins
Steven 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
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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 welfareexcluding military aid
• Provided as a grant or a subsidized loan
Three Broad Categories of AID
Aid 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
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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
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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 provided 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 poorest 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.
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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 support 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 undermined growth. To illustrate this
point, the authors employ the ideas of absorptive 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 relationships 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
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 costeffective multilateral program that treated “river
blindness” in 11 West African countries.
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This concludes the Norton Media Library
Slide Set for Chapter 14
Economics of
Development
SIXTH EDIT ION
By
Dwight H. Perkins
Steven Radelet
David L. Lindauer