7 Foreign Aid

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Foreign Aid to Less Developed Countries - T&S

1) public (official) bileteral (one country to another country) and multilateral (WB or UN) development assistance. e.g. the WB gives a loan to Kenya.

2) private (unofficial) assistance provided by nongovernmental organisation. 

Does not inclde military aid, or commercial flows of private capital. General tradin with other countries is not considered foreign aid, although it may benefit the recieving developing country.

'Any flow of capital to LDCs that meet two criteria:
- it's objective should be non-commercial from the point of view of the donor (not just trading / shopping)
- characterised by concessional terms i.e. the repayments and interest rates should be softer than those of commercial loans).'

Measuring Aid - Issues

1) Can't just add up the dollar values of loans and grants. As the loan must be repaid with interest the donor recieves more, and the beneficiary recieves less than the face value of the loan. 

2) The aid may be tied to source or project. Donor may specify trade with a particular company which costs more than others, but they benefit from the investment. Also, projects may require investment in expensive machinery. Concerns as to whether the donors preferences distract from the country's need. 

3) Need to distinguish between nominal value: face value
and real value: adjusts for inflation / PPP

Amounts and Allocations: Public Aid (official aid)

Official Devlopment Assistance ODA:

  • grants
  • loans
  • technical assistance

Grown lots! $5 billion 1960

   $100 billion 2005

United States contributes the largest amount of money (absolute tersm) to ODS, but relative to others it provides the lowest % of GNI = 0.22%. Well below UN agrreement of 0.70%.

Distribution is weird. India has 50% of the world's poorest people but recieved only $2 per person in aid, whereas Iraq received $750.

Mozambique LIC = $65
Serbia MIC = $140

Thus, distribution is only secondarily determined by the needs of the people. Largely based on political or military interest  or donor decisions / preferences.

Multilateral aid (WB or UN) is more rational but still richer countries attract more funding than poorer.  

Why donors give aid

Usually because it's in their political,


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