This document provides information on different types of financial flows to developing countries, including foreign aid, remittances, foreign direct investment, and loans. It discusses the scale of these flows, noting that in 2010 private flows such as FDI made up 89.1% of total official and private flows, compared to 10.9% for official development aid. The document also outlines different types of foreign aid and perspectives on the impact and effectiveness of aid, including debates around whether aid fosters long-term growth and self-sufficiency or dependence.

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

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

3. 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 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: www.guardian.co.uk/global-development/aid

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 Aid
Long term aid for health and Well targeted aid might add
education projects - builds around 0.5% to growth rate
human 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 donors
finance corruption / strengths
forget cost of maintaining a
/ locks-in ruling elites
pet capital project
Some arguments
against overseas
aid
Dependency culture – one aid
Aid may lead to a distortion of
paradox 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 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

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 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.

10. 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

11. 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

12. Aid Graduates
Countries whose overseas aid as a share of GDP has declined over the years
Country Maximum Year Minimum aid as % of Year Growth of
aid as % of GDP GDP per
GDP capita p.a.
1990–2010
Bangladesh 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 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.

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. Tutor2u
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