Aid and Economic Development

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Unit 4 A2 macro - short presentation for use in a class studying the economics of overseas aid

Unit 4 A2 macro - short presentation for use in a class studying the economics of overseas aid

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  • 1. A2 Macro – October 2012Unit 4 Macro: Aid and Development
  • 2. Financial FlowsForeign (overseas) development aidRemittances from migrantsForeign direct investment (FDI)Portfolio capital investmentLoans from international institutions
  • 3. Scale of Financial FlowsAid and Private Capital Flows to Developing Countries 2010 Flows US$ billions % of total official and private flowsTotal Official Development 128 10.9% Flows Total Private Flows 1042 89.1% (including remittances) Foreign direct investment 509 43.5% Portfolio Investment 128 10.9%Net private long-term debt 84 7.2% Remittances 321 27.4%
  • 4. Different types of aid• Bi-lateral aid: From one country to another• Multi-lateral aid: Channelled through international bodies• Project aid: Direct financing of projects for a donor country• Technical assistance: Funding of expertise of various types• Humanitarian aid: Emergency disaster relief, food aid, refugee relief and disaster preparedness• Soft loans: A loan made to a country on a concessionary basis with a lower rate of interest• Tied aid: i.e. projects tied to suppliers in the donor country• Debt relief – e.g. cancellation, rescheduling, refinancing or re- organisation of a country’s external debts
  • 5. UK Overseas Aid Source:
  • 6. Building the Case for Overseas Aid Helps to overcome the Project aid can fast forward savings gap + aid can play a investment in critical key role in stabilising post- infrastructure projects –conflict environments and in capital deepening effects disaster recovery +higher productivity Building a Case for Overseas AidLong term aid for health and Well targeted aid might add education projects - builds around 0.5% to growth ratehuman capital and stronger of poorest countries - this social institutions. Aid benefits donor countries too projects for enterprise as trade grows
  • 7. Risks and Costs of Overseas Aid Lack of transparency – Poor governance - aid can be hundreds of $m spent on aid expropriated and leaves consultants and developed recipient country - aid can country NGOs – many donorsfinance corruption / strengths forget cost of maintaining a / locks-in ruling elites pet capital project Some arguments against overseas aidDependency culture – one aid Aid may lead to a distortion ofparadox is that aid tends to be market forces and a loss of most effective where it is economic efficiency and risks needed least – it may stunt of inflation entrepreneurial culture
  • 8. Paul Collier on Aid “There is mounting cynicism about aid—some of it amply justified by past donorpractices. Yet few realise just how smartand highly geared modern British aid canbe. Perhaps the most sensational recenteconomic development in Africa has beenthe explosive growth of “branchless”telephone banking in Kenya. DfID thoughtup the idea, spent money successfullypiloting it, and demonstrated to the privatesector that there was a marketopportunity. British aid was smart, andthereby catalytic.” Source: Prospect Magazine, 2010
  • 9. Dierk Herzer and Oliver Morrissey• More often than not aid damages developing countries• An increase in the aid-to-GDP ratio is associated with a long-run decrease in GDP in almost two-thirds of the countries• 3 key barriers to aid effectiveness1. Religious tensions, which are common in the poorest countries, and a big role for the military in politics2. Large government, which is often a sign of a large military presence and a corrupt government.3. Low level of law and order. ‘Law and order’ captures the quality of institutions, which many economists argue are essential to economic development.Better law and order suggests that countries are more open to trade and have better protection of property rights. This gives people the ability and incentives to invest aid money productively in the economy.
  • 10. Dambisa Moyo – Dead Aid“I have long believed that far from being acatalyst, foreign aid has been the biggestsingle inhibitor of Africas growth. Amongits shortcomings, aid is correlated withcorruption, fosters dependency, andinvariably instils bureaucracy that hindersthe emergence of an essentialentrepreneurial class.For Africa to grow in a sustained way,foreign aid will have to be dramaticallyreduced over time, forcing countries toadopt more transparent strategies tofinance development.” Source: Independent, March 2009
  • 11. Moyo’s Tough Love Approach“In five years, all aid to Africamust stop. In its place,African nations will need toimplement new policiesincluding micro-loans,improved remittances andformalised domestic savingsschemes, as well as,internationally, improvingforeign direct investment,borrowing responsibly andsecuring more equitabletrading arrangements withthe west.”Source: Dambisa Moyo, Dead Aid
  • 12. Aid GraduatesCountries whose overseas aid as a share of GDP has declined over the yearsCountry Maximum Year Minimum aid as % of Year Growth of aid as % of GDP GDP per GDP capita p.a. 1990–2010Bangladesh 8.2% 1977 1.3% 2009 5.8%Botswana 31.6% 1966 0.5% 2005 7.1%China 0.7% 1992 0.01% 2008 11.6%Ghana 16.3% 2004 4.1% 2008 4.0%India 4.1% 1964 0.1% 2009 7.0%Kenya 16.8% 1993 6.1% 2008 3.1%Malaysia 1.2% 1987 0.07% 2009 6.1%Vietnam 5.9% 1992 2.9% 2008 7.4% Source: World Bank, Global Development Finance
  • 13. Michael Clemens, Steven Radelet, Rikhil Bhavani and Samuel Bazzi (EJ, 2012)The impact depend on policies, ‘deep’ structural characteristicsand the size of the inflow. When aid rises by 1% of a recipientcountry’s GDP, growth typically rises by between 0.1 and 0.2%within the following five to ten years. This positive but modesteffect tends to decrease at high levels of aid receipts.
  • 14. Duflo and Banerjee – Poor Economics• Duflo and Banerjee - Poverty Action Lab “Precisely because• Have pioneered use of randomised controlled trials to find out what works [the poor] have so in development little, we often find• Test efficacy of projects / interventions them putting much within a population – 2 or more groups careful thought into (inc control)• Many “top-down” aid projects afflicted their choices: They by have to be – Ideology (prejudices, beliefs) sophisticated – Ignorance (info gaps about local economists just to conditions) – Inertia (failure to change when project survive.” does not work)
  • 15. Evaluation arguments on aid• Aid can bring economic, human, environmental benefits• Development can take place without aid• Well targeted aid can boost growth but the time lags can take years• Aid effectiveness boosted by: – Randomised control trials – Improve transparency of aid budgets – Conditionality linked to improved governance – Aid that stimulates and supports enterprise• Different aid projects can affect growth at different times and to different degrees• Consider alternatives to direct aid – e.g. Debt forgiveness, lowering trade barriers for least developed countries
  • 16. Breaking out of the aid cycle Sovereign Wealth Funds Formalised Micro- domestic Finance savings Schemes Remittances More from equitable Diaspora trade
  • 17. Tutor2uKeep up-to-date with economics, resources, quizzes and worksheets for your economics course.