Aid, debt and economic development (4.6)

Revision cards for section 4.6 (chapter 32) in the International Baccalaureate economics course

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Foreign aid - any assistance that is given to a country that would not have been provided through normal market forces

Aid is given for a number of reasons including:

  • To help people who have experienced natural disaster or war
  • To help achieving development in developing countries
  • Create and strengthen political or strategic alliances
  • Fill savings gap in developing countries
  • Encourage investment
  • Improve levels of technology
  • Fund development projects

Official Development Assistance (ODA) - aid organized by a government or an official government agency ( such as the UN)

Unofficial aid - aid organized by non-governmental organizations (NGO)

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Humanitarian aid

Humanitarian aid is given to countries in short-term suffering such as, droughts wars or natural disasters

This is called grant aid (short-term aid) and is provided as a gift, that does not need to be paid back

There are three main forms of grant aid:

  • Food aid - provision of food, or money to pay for food. Also includes money for transport, storage and distribution of food
  • Medical aid - provision of medical services, as well as money to facilitate medical services
  • Emergency aid - provision of emergency supplies, including temporary shelters, tents, clothing, fuel, heating and lighting

The above forms of grant aid can all be classified as ODA or unofficial aid, depending on their origin

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Development aid

Development aid is given to decrease poverty in the long run and is often given as ODA

It is given with the promotion of economic development and welfare as its main objective

In 1970, a UN General Assembly resolution was adopted, this agreed that nations would aim to spend 0.7% of their national incomes on ODA

By 2008 only five countries has managed to reach this goal: Denmark (0.82%), Luxembourg (0.97%), Netherlands (0.8%), Norway (0.88%) and Sweden (0.98%)

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Types of development aid

The book mentions five types of development aid:

Long-term loans - loans that are repayable by the developing country over a period of 10 to 20 years. Known as concessional loans/soft loans. The loans can occasionally be paid back in foreign currency and sometimes in local currency, or sometimes both. Can be both official and non-official loans

Tied aid - grants or loans to a developing country. The condition for tied aid is they are used to buy goods services from the donor country

Project aid - given to a specific project in a country. Grant aid and does often not need to be paid back. Often used to improve infrastructure

Technical aid - sometimes included in project aid. It has two aims, the first is to raise the level of technology ad technicians. The second is to increase the quality of human capital. Technical aid is sometimes provided through scholarships to let managers and technicians study abroad.

Commodity aid  - grant aid given to increase productivity in developing countries. Provides necessary commodities and raw materials

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The World Bank Group

The World Bank Group consists of five individual organizations. The main aims are to provide aid and advice to developing countries, reducing poverty levels and encouraging and safeguarding international investment. The main goal is is to promote economic development. The five organizations of the World Bank is:

  • The international Bank for Reconstruction and Development (IBRD) - grants loans to countries. The loans are generated by World Bank bonds in global capital markets
  • The International Finance Corporation (IFC) - aims to promote private sector investment in developing countries
  • The International Development Association (IDA) - gives interest-free loans, with repayment periods up to 30 years
  • The Multilateral Investment Guarantee Agency (MIGA) - promotes FDI in developing countries by selling political risk insurance to MNCs
  • The International Center for Settlement of Investment Disputes (ICSID) - facilitates the settlement of investment disputes between member countries and individual investors
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Concerns about aid

Even though aid is necessary and contributing to short-term suffering, there has been no significant correlation between the level of aid and the growth of GDP

Some countries does not put welfare or the people first, meaning that the money goes to a minority of the population who are wealthy and does not need the money

Sometimes aid is used for political reasons rather than being used the places they need it the most. A result of this is that the poorest people of the world receives less aid than middle class citizens

Tied aid is not as effective as untied aid, as the developing country is unable to look for the cheapest good or service, as they need to spend the money in the donor country. Secondly it does not create employment or extra output, since no expenditure takes place there

Short-term provision of food aid can be essential, but it forces the prices down on domestic food products, as demand falls for these

The developing country may develop a dependency for the aid

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Non-government organizations (NGO)

Some example of NGOs are Greenpeace, Amnesty International and Doctors Without Borders

As most NGOs differs in size, orientation, nationality, income and success, it is hard to generalize them, however, most of them shares a common goal of promoting economic development, humanitarian ideals and sustainable development.

Their work might include emergency relief in case of disaster and long-term development assistance

They have two main activities, implementing projects in developing countries and they act as lobbyist to influence public policy in certain areas including; poverty, workers rights human rights and the environment

NGOs have a better and deeper understanding of the issues and challenges, making unofficial aid more useful

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The International Monetary fund (IMF)

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 - says IMF

IMF uses three practices to achieve its goals; surveillance, technical assistance and financial assistance

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One of the drawback to growth and development achieved by aid, is that the money needs to be paid beck

Mexico was the first country (in 1982) becoming unable to pay back their debt and interests. This started what is known as the 'Third World Debt Crisis'

The IMF lent money to the developing countries that needed it, as long they adopted certain policies, such as privatization of nationalized industries and charging for basic services such as education and health

This led to unemployment, reductions in government provided services such as health care and education, a fall in wage levels and increased prices of products (caused by a lack of government subsidies)

Developing countries started to experience 'de-development', leading to debate concerning debt relief

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