Aid and Development

1. A2 Macro – October 2012 Unit 4 Macro: Aid and Development

3. 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 reorganisation of a country’s external debts

7. 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 The UK spent £8.6bn official development relief andof this wasonpreparedness and the remainder was core disasterdistributed bilaterally, assistance in 2012. Around two-thirds donations to A loan made to a country World Bank, which then • Soft loans:multilateral institutions such as theon a concessionary basis distribute aid themselves. with a lower rate of interest The aid: i.e. projects tied to in sub-Saharan the and South Asia. • TiedUK’s bilateral aid is concentrated suppliers in Africadonor country Ethiopia is the largest recipient of bilateral aid (£344m in 2011). 82% of the • Debt relief – e.g. cancellation, rescheduling, refinancing or reUK’s multilateral aid goes to the EU, the UN and the World Bank for their own development a country’s external debts organisation ofwork. Contributions to EU development work have increased substantially over the past 30 years.

8. UK Aid Data (2012)

9. UK Aid Data (2012)

10. UK Aid Data (2012) UK Bi-Lateral Aid Review 2011 1. Aid stopped to China and Russia 2. No new financial grant aid to India 3. UK will end direct financial support to South Africa by 2015 4. Part of the bilateral aid to Rwanda, Uganda and Malawi has been suspended.

15. Financial Flows Foreign (overseas) development aid Remittances from migrants Foreign direct investment (FDI) Portfolio capital investment Loans from international institutions

20. Financial Flows Foreign (overseas) development aid Remittances from migrants Foreign direct investment (FDI) Portfolio capital investment Loans from international institutions The UK Overseas Aid Budget (Update) The Coalition government has promised to spend 0.7 per cent of national income (GDP) on overseas development aid each year. That means the UK will spend £12.2bn on “official development assistance” in 201516

21. Scale of Financial Flows Aid and Private Capital Flows to Developing Countries 2010 Flows US$ billions % of total official and private flows Total Official Development Flows Total Private Flows (including remittances) Foreign direct investment 128 10.9% 1042 89.1% 509 43.5% Portfolio Investment 128 10.9% Net private long-term debt 84 7.2% Remittances 321 27.4%

22. Scale of Financial Flows Aid and Private Capital Flows to Developing Countries 2010 Flows US$ billions % of total official and private flows Total Official Development Flows Total Private Flows (including remittances) Foreign direct investment 128 10.9% 1042 89.1% 509 43.5% Portfolio Investment 128 10.9% Net private long-term debt 84 7.2% Remittances 321 27.4%

23. Building the Case for Overseas Aid Helps to overcome the savings gap + aid can play a key role in stabilising postconflict environments and in disaster recovery Project aid can fast forward investment in critical infrastructure projects – capital deepening effects +higher productivity Building a Case for Overseas Aid Long term aid for health and education projects - builds human capital and stronger social institutions. Aid projects for enterprise Well targeted aid might add around 0.5% to growth rate of poorest countries - this benefits donor countries too as trade grows

27. Risks and Costs of Overseas Aid Poor governance - aid can be expropriated and leaves recipient country - aid can finance corruption / strengths / locks-in ruling elites Lack of transparency – hundreds of $m spent on aid consultants and developed country NGOs – many donors forget cost of maintaining a pet capital project Some arguments against overseas aid Dependency culture – one aid paradox is that aid tends to be most effective where it is needed least – it may stunt entrepreneurial culture Aid may lead to a distortion of market forces and a loss of economic efficiency and risks of inflation

31. Paul Collier on Aid “There is mounting cynicism about aid— some of it amply justified by past donor practices. Yet few realise just how smart and highly geared modern British aid can be. Perhaps the most sensational recent economic development in Africa has been the explosive growth of “branchless” telephone banking in Kenya. DfID thought up the idea, spent money successfully piloting it, and demonstrated to the private sector that there was a market opportunity. British aid was smart, and thereby catalytic.” Source: Prospect Magazine, 2010

32. 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 effectiveness 1. Religious tensions, which are common in the poorest countries, and a big role for the military in politics 2. 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.

33. Dambisa Moyo – Dead Aid “I have long believed that far from being a catalyst, foreign aid has been the biggest single inhibitor of Africa's growth. Among its shortcomings, aid is correlated with corruption, fosters dependency, and invariably instils bureaucracy that hinders the emergence of an essential entrepreneurial class. For Africa to grow in a sustained way, foreign aid will have to be dramatically reduced over time, forcing countries to adopt more transparent strategies to finance development.” Source: Independent, March 2009

34. Moyo’s Tough Love Approach “In five years, all aid to Africa must stop. In its place, African nations will need to implement new policies including micro-loans, improved remittances and formalised domestic savings schemes, as well as, internationally, improving foreign direct investment, borrowing responsibly and securing more equitable trading arrangements with the west.” Source: Dambisa Moyo, Dead Aid

35. Aid Graduates Countries whose overseas aid as a share of GDP has declined over the years Country Maximum aid as % of GDP Year Minimum aid as % of GDP Year Growth of GDP per capita p.a. 1990–2010 8.2% 1977 1.3% 2009 5.8% 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% 4.1% 1964 0.1% 2009 7.0% 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% Bangladesh Botswana India Kenya Source: World Bank, Global Development Finance

36. Michael Clemens, Steven Radelet, Rikhil Bhavani and Samuel Bazzi (EJ, 2012) The impact depend on policies, ‘deep’ structural characteristics and the size of the inflow. When aid rises by 1% of a recipient country’s GDP, growth typically rises by between 0.1 and 0.2% within the following five to ten years. This positive but modest effect tends to decrease at high levels of aid receipts.

37. Duflo and Banerjee – Poor Economics • Duflo and Banerjee – Economists at the Poverty Action Lab • Have pioneered use of randomised controlled trials to find out what works in development • Test efficacy of projects / interventions within a population – 2 or more groups (inc control) • “Top-down” aid projects afflicted by – Ideology (prejudices, beliefs) – Ignorance (info gaps about local conditions) – Inertia (failure to change when project does not work) “Precisely because [the poor] have so little, we often find them putting much careful thought into their choices: They have to be sophisticated economists just to survive.”

38. Angus Deaton on Aid • When the conditions for development are present, aid is not required. When they do not exist, aid is not useful and probably damaging • Foreign aid is antidemocratic because it frees local leaders from having to obtain the consent of the governed

39. Deaton on Aid Alternatives • What should the West do instead of providing aid? It can invest in finding a vaccine for malaria, still a mass killer. It can push drug companies to tackle diseases that threaten poorer countries. It can support the free flow of information about inventions and new management techniques. It can relax trade barriers and provide poor countries with expert advice at the bargaining table. It can ease immigration restraints and accept more newcomers. Is aid a roadblock to economic development?

40. 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

41. Breaking out of an aid cycle Africans living abroad send more money home to their families than official development assistance by western aid donors. In 2010 the African diaspora remitted $51.8bn; in the same year ODA to Africa was $43bn. Source: FT, Oct 2013 Sovereign Wealth Funds Formalised domestic savings Remittances from Diaspora MicroFinance More equitable trade flows

42. A Selection of Articles to Read

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