Foreign aid can take various forms, including money, materials, and services provided from one country to another for development purposes. The IMF and World Bank often require structural adjustment policies focused on reducing inflation, budget deficits, trade barriers, and subsidies as conditions for loans. However, structural adjustment has also been criticized for worsening inequality, unemployment, and national sovereignty in recipient countries.

1. Chapter-05
Foreign resource and development

2. Foreign Aid
• In international relations, aid (also known as international aid, overseas aid, or foreign aid) is
a voluntary transfer of resources from one country to another, given at least partly with the
objective of benefiting the recipient country.
• The most basic foreign aid definition states that it is “resources given from one country to
another.” These resources include money, materials, and manpower that are donated to
developing countries around the world.
• According to Victoria Williams: Foreign aid, the international transfer of capital,
goods, or services from a country or international organization for the benefit of the
recipient country or its population. Aid can be economic, military, or emergency
humanitarian (e.g., aid given following natural disasters).
– Carol J. Lancaster, Fellow of Center for Global Development and Dean of Edmund A.
Walsh School of Foreign Service, Georgetown University, explains aid as "A voluntary
transfer of public resources, from a government to another independent government, to
an NGO, or to an international organization with at least a 25 per cent grant element,
one goal of which is to better the human condition in the country receiving the aid".
• Example: Economic, technical, or military aid given by one nation to another for purposes of
relief and rehabilitation, for economic stabilization, or for mutual defense.

3. Foreign Aid ….
• It’s anything that one country donates or provides for the benefit of another
country.
– Usually this takes the shape of money.
– However, foreign aid can also include goods, such as food or technical
support.
• The Congressional Research Service (US based) breaks down foreign aid
into the following 6 categories:
– i. Peace & Security,
– ii. Investing in People,
– iii. Humanitarian Assistance,
– iv. Economic Growth,
– v. Governing Justly & Democratically, and
– vi. Program Management.

4. Foreign Aid…..
• Any transfers of capital from one country to another cannot be
treated as foreign aid.
• According to economists, any flow of capital is included
within the sphere of foreign aid to LDCs if it satisfies three
criteria:
– (i) developmental or charitable (at least 20 to 25% of total
aid)
– (ii) non-commercial, and
– (iii) concessional.
• Forms of foreign aid: mainly 02 forms
– 1. Grants and
– 2. Loans (Containing growth elements)

5. Foreign Aid …
• Types of aid: on the basis of
• 1. Duration:
– a) Long-term: Usually more than 5 years
– b) Short-term: Less than 5 years
– c) Emergency: On urgent need
• 2. Delivery:
– a) Financial
– b) Goods (may be food, clothing etc.)
– c) Services (From expert people or organizations)
• 3. Sources:
– a) Government
– b) Non-government
– c) Charity
– d) Individual

6. Foreign Aid ….
• 4. International dimension:
– a) Bi-lateral: When one country gives aid to
another country. Example: If US gives aid to
Bangladesh.
– b) Multi-lateral: When an multilateral organization
provides aid to a country. Example: If IMF or
World bank gives aid to Bangladesh.
• 5. Dependency:
– Tied aid : Various restrictions and conditions are
imposed by the donor countries.

7. Foreign Aid …
• It’s worth noting here that the US government classifies foreign aid
broadly in only two categories: (i) Military aid and (ii) Economic aid.
• (i) Military aid includes Peace & Security, which can include funding for
counterterrorism and counter narcotics initiatives, conflict mitigation, and
security sector reform.
• (ii) Economic aid is comprised of the following categories:
– a. Investing in People: Funding to protect vulnerable communities and social
services, including health and education.
– b. Humanitarian: Funding to meet immediate needs during crises like
earthquakes and hurricanes. This includes assistance, disaster readiness, and
migration management.
– c. Economic Growth: Funding that includes support for trade and investment,
infrastructure, agriculture, and the environment.
– d. Governing Justly & Democratically: Funding to promote political
stability. This includes funding for good governance, human rights, and civil
society.

8. Top 10 aid giving countries
Sl Countries Amount in US$
billion
1 China 38.00
2 USA 34.62
3 Germany 23.81
4 UK 19.37
5 Japan 15.51
6 European Union (EU) 14.83
7 France 12.18
8 Canada 6.40
9 Sweden 5.40
10 Netherlands 5.29
Source: Wikipedia (Data based on 2019)

9. Top 10 aid receiving countries
Sl Countries Amount in US$ billion
1 India 4.21
2 Turkey 4.10
3 Afghanistan 2.95
4 Syria 2.77
5 Ethiopia 1.94
6 Bangladesh 1.81
7 Morocco 1.74
8 Vietnam 1.61
9 Iraq 1.60
10 Indonesia 1.48
Source: https://www.wristband.com/content/which-countries-provide-
receive-most-foreign-aid/ (Based on 2017)

10. Advantages of foreign aid
1. Economic growth is a main advantage.
2. Nations that receive money invest it into their economy which helps to create
more jobs for the people, better infrastructure, and stabilize their
economy.
3. Nations such as China GDP growth rate increased 9.65% from the
investment of the foreign aid into their nation’s economy.
4. Foreign aid has other advantages, such as fighting hunger, saving lives and
providing civilians with shelters, clean water and medicine.
5. Pharmaceutical drugs are dispensed free or subsidized to those in need
and training is given to doctors and nurses which will ensure they know
the correct way to deal with a patient’s health.
6. Foreign aid is also a benefit the donor.
7. Donor nations are able to control the funds that they give to the nations by
asking for or requiring certain gains in return such as use of military bases
and other resources the nation is in need of.
8. The gains in return create a strong economical, cultural and or political bond
between recipient and donor nations.

11. Disadvantages of foreign aid
1. A disadvantage of foreign aid however is an increase in dependency
from recipient nations.
2. Governments that receive aid become dependent on steady flow so
that while still being able to support the people of its nation, they can
begin putting the money into the sectors of the country which
need the assistance.
3. Corruption is a big disadvantage of foreign aid. Aid money that is
being given to government officials are being put straight into their
own pocket rather than in the country to solve its problems. (In this
case the only people who benefit from the money are government
officials rather than the nation and its people.) Mobutu Sese Seko,
who was the president of Zaire from 1965 – 1997 is thought to have
stole $5 billion from its nations aid supply.
4. Donor nations also use the land of recipients in negative ways.
5. When giving aid, donors are often granted use of the recipient land, in
which they use to dump toxic waste onto, harming the wildlife and
polluting the recipient country.

12. For and against of foreign aid
For Against
Emergency aid in times of disaster saves lives.
Aid can increase the dependency of LEDCs on donor countries.
Sometimes aid is not a gift, but a loan, and poor countries may
struggle to repay.
Aid helps rebuild livelihoods and housing after a disaster.
Aid may not reach the people who need it most. Corruption may
lead to local politicians using aid for their own means or for
political gain.
Provision of medical training, medicines and equipment can
improve health and standards of living.
Aid can be used to put political or economic pressure on the
receiving country. The country may end up owing a donor
country or organisation a favour.
Aid for agriculture can help increase food production and so
improve the quality and quantity of food available.
Sometimes projects do not benefit smaller farmers and projects
are often large scale.
Encouraging aid industrial development can create jobs and
improve transport infrastructure.
Infrastructure projects may end up benefiting employers more
than employees.
Aid can support countries in developing their natural
resources and power supplies.
It may be a condition of the investment that the projects are run
by foreign companies or that a proportion of the resources or
profits will be sent abroad.
Projects that develop clean water and sanitation can lead to
improved health and living standards.
Some development projects may lead to food and water costing
more.

13. Aid dependency

14. Aid dependency…
• When a country becomes too much dependent on foreign aid is called aid dependency.
• Causes of aid dependency
1. Scarce internal resources
2. Trade deficit
3. Food security
4. Natural calamity
5. Benefit of government
6. Necessity of more growth
7. Luxurious consumption
Ways to reduce aid dependency
1. Increase savings in government sectors
2. Increase savings in the private sectors
3. Increase FDI
4. Increase private investment
5. Decrease aid intensive investment
6. Efficient utilization of existing capacity
7. Increase export
8. More job creation
9. increase trade

15. Trade not Aid as engine of growth
• This is the economic idea that the best way to promote economic development is
through promoting free trade and not providing direct foreign aid.
•

16. Trade not Aid as engine of growth…
• Logic of ‘Trade not Aid’
1. A culture of dependency. Foreign aid to developing economies is invariably wasteful
and can create a culture of dependency. Also, recipients of aid may feel lower self-
esteem, which is damaging in the long-run.
2. Aid given for bad motives. Aid is often subject to vested interests and fails to make real
improvements in living standards.
3. Trade increases welfare. Increasing trade is the best way for developing economies to
improve their real economic welfare, and enable a sustainable increase in economic
welfare. Most economists are united on the benefits of free trade to improve economic
welfare.
4. Success of trade in S.E. Asia. Supporters of ‘trade not aid’ point to countries in south
east Asia who have been able to dramatically increase economic welfare through
increasing trade.
5. Democratic costs. Foreign aid can disrupt political democracy in developing economies.
government – and avoid a democratic change. It is arbitrary which groups receive aid.
6. Foreign aid can displace domestic government incentives to invest in public
infrastructure.

17. Trade not Aid as engine of growth…
• How to Implement ‘Trade not Aid’
1. Supporters of ‘trade not aid’, would seek to remove any tariff
barriers or obstacles to free trade and opening up markets to
competition
2. Supporters of free trade usually support free market reforms to
reduce the role of government interference and allow market
forces to encourage innovation, efficiency and increased
economic output. Policies to support free trade may involve.
3. Reducing power of trades unions
4. Privatisation of inefficient state owned industries.
5. Cracking down on corruption
6. Lower corporation and income taxes to increase the
incentive to invest in export industries.

18. Trade not Aid as engine of growth….
• Criticisms of ‘Trade not Aid’
• Aid for trade. Joseph Stiglitz has argued that aid is necessary to deal with global
inequality and enable the poorer developing economies to fully benefit from the
potential of trade. For example, aid can help improve infrastructure and transport
links.
1. Infant industry argument. Developing countries may not be in a position to benefit from
free trade. For example, their comparative advantage may lie in primary products which are
subject to fluctuating commodity prices.
2. Not all countries are the same. Several south-east Asian economies have benefitted from
growth of trade (though it was not without protectionist measures) but this doesn’t mean the
same model can be transferred to land-locked economies in Sub-Saharan Africa
3. Aid can help overcome capital shortages and crippling debt payments.
4. Benefits of free trade are not always equitably distributed.
5. Market failure can lead to an under-provision of important infrastructure such as education
and infrastructure. Aid can help overcome these areas of market failure and help the
economy to grow at a faster rate.
6. Aid needed in emergencies. At various times, international aid has helped to rebuild
countries and regions recovering from shock. For example, the Marshall Plan for Western
Europe – post-Second World War. Foreign aid to help with humanitarian crisis.

19. IMF conditionality
• When a country borrows from the IMF, its government agrees to adjust its
economic policies to overcome the problems that led it to seek financial
aid.
• These policy adjustments are conditions for IMF loans and serve to ensure
that the country will be able to repay the IMF.
• This system of conditionality is designed to promote national ownership of
strong and effective policies.
• Conditionality:
– Conditionality covers the design of IMF-supported programs—that is,
macroeconomic and structural policies—and the specific tools used to monitor
progress toward goals outlined by the country in cooperation with the IMF.
– Conditionality helps countries solve balance-of-payments problems without
resorting to measures that are harmful to national or international prosperity.
– At the same time, the measures are meant to safeguard IMF resources by
ensuring that the country’s balance of payments will be strong enough to
permit it to repay the loan.

20. IMF conditionality…..
• Compliance with IMF conditions
• Most IMF financing is paid out in installments and linked to demonstrable policy
actions. This is intended to ensure progress in program implementation and reduce
risks to IMF resources.
• Policy commitments agreed with country authorities can take different forms. They
include:
– 1. Elimination of price controls
– 2. Budget consistent with fiscal framework
– 3. Minimum level of government primary balance
– 4. Ceiling on government borrowing
– 5.Minimum level of international reserves
– 6. Minimum domestic revenue collection
– 7. Minimum level of social assistance spending
– 8. Improve financial sector operations
– 9. Build up social safety nets
– 10. Strengthen public financial management
– 11. Structural adjustment: Privatisation, deregulation, reducing corruption and bureaucracy.
– the same conditionality also applied by World Bank

21. Structural adjustment policy (SAP)
– A structural adjustment is a set of economic reforms that a
country must adhere to in order to secure a loan from the
International Monetary Fund and/or the World Bank.
– Structural adjustments are often a set of economic policies,
including reducing government spending, opening to
free trade, and so on.
– The purpose is to adjust the country's economic structure,
improve international competitiveness, and restore its
balance of payments.
– SAPs have been promoted by the World Bank and
International Monetary Fund (IMF) since the early 1980s
by the provision of loans conditional on the adoption of
such policies.

22. Structural adjustment policy (SAP)...
• Structural adjustment policies
1. Policies to tackle Inflation (e.g. tightening of monetary or fiscal policy). In practice, this
may involve higher interest rates or higher taxes.
2. Policies to deal with a budget deficit. Higher taxes, lower spending. Can be combined with
the policy to reduce inflation.
3. Removal of Tariff Barriers which protect domestic industries and opening the economy to
free trade.
4. Abandoning Fixed Exchange Rates and allowing the currency to float – In practice, this
involves a devaluation. This can help give exports greater competitiveness and help boost
domestic demand. However, it increases the cost of imports and usually reduces living
standards.
5. Privatisation of state-owned industries. This raises money for the government, but also, in
theory, can help improve efficiency and productivity. because private firms have a profit
incentive to be more efficient.
6. Ending food subsidies. This can distort the market and lead to over-supply and hold back
diversification of the economy to a more industrial-based economy.
7. Reducing red tape and bureaucracy
8. Closing tax loopholes and reducing corruption
9. De-regulation of markets to encourage competition and more firms to enter the industry.

23. Structural adjustment policy (SAP)..
• Problems With Structural Adjustment
• 1. Policies of tackling inflation. Higher interest rates, higher taxes, often cause a recession and mass
unemployment. They are often painful in the short term. This is perhaps the biggest reason why structural
adjustment is often very unpopular in the countries where it is implemented.
• 2. Spending Cuts falls on the poorest section of society. Often structural adjustment has led to spending cuts on
important welfare services such as education and health care. Structural adjustment has often been perceived as
widening inequality.
• 3. Loss of National Sovereignty. IMF policies need to be implemented otherwise there can be a heavy financial
penalty. This gives foreign bodies great influence over key economic issues in developing economies.
• 4. Greater inequality. Structural adjustment policies have often shown a tendency to greater inequality. For
example, privatisation has often benefitted a small rich elite (e.g. Russia 1995) and have not benefitted a wider
population.
• 5. Ignore social benefits. Privatisation of key public utilities like Water (e.g. Bolivia) have led to higher prices for a
key commodity. Arguably market incentives don’t have the same importance when the industry plays an important
social welfare function. But, structural adjustment policies have often stuck to a certain ideology even when not
appropriate.
• 6. Unemployment. Control of inflation and fiscal austerity has led to higher unemployment and lower economic
growth – at least in the short-term.
• 7. Social development ignored. To meet fiscal criteria, governments have often cut welfare spending programs
which benefit the poorest members of society.
• 8. Free trade often hampers diversification. Developing economies often have a comparative advantage in selling
raw materials. But, this prevents economy diversifying. To make things worse, developed countries often impose
tariffs on agricultural exports, but then want developing countries to have free trade for their exports.

24. Structural adjustment policy (SAP)..
• Evaluation
– There are multiple criticisms that focus on different elements of
SAPs.
– There are many examples of structural adjustments failing.
– In Africa, instead of making economies grow fast, structural
adjustment actually had a contractive impact in most countries.
– Economic growth in African countries in the 1980s and 1990s
fell below the rates of previous decades.
– Agriculture suffered as state support was radically withdrawn.
– After independence of African countries in the 1960s,
industrialization had begun in some places, but it was now wiped
out

25. Washington Consensus
– The Washington Consensus refers to a set of free-market economic
policies supported by prominent financial institutions such as
the International Monetary Fund, the World Bank, and the U.S.
Treasury.
– A British economist named John Williamson coined the term
Washington Consensus in 1989.
– The ideas were intended to help developing countries that faced
economic crises.
– In summary, The Washington Consensus recommended structural
reforms that increased the role of market forces in exchange for
immediate financial help.
– Some examples include free-floating exchange rates and free trade.
– Critics have pointed out that the policies were unhelpful and imposed
harsh conditions on the developing countries, others have defended the
long-term positive impact of these ideas.

26. Washington Consensus….
• The Original Principles of The Washington Consensus
• These are the ten specific principles originally set out by John Williamson in 1989:
1. Low government borrowing. The idea was to discourage developing economies from
having high fiscal deficits relative to their GDP.
2. Diversion of public spending from subsidies to important long-term growth supporting
sectors like primary education, primary healthcare, and infrastructure.
3. Implementing tax reform policies to broaden the tax base and adopt moderate marginal tax
rates.
4. Selecting interest rates that are determined by the market. These interest rates should be
positive after taking inflation into account.
5. Encouraging competitive exchange rates through freely-floating currency exchange.
6. Adoption of free trade policies. This would result in the liberalization of imports,
removing trade barriers such as tariffs and quotas.
7. Relaxing rules on foreign direct investment.
8. The privatization of state enterprises. Typically, in developing countries, these industries
include railway, oil, and gas.
9. The eradication of regulations and policies that restrict competition or add unnecessary
barriers to entry.
10. Development of property rights.

27. Washington Consensus…
• Criticisms of The Washington Consensus
– Some economists argue that free trade is not always in the best
interest of developing economies. Some strategic and infant industries
have to be protected initially to provide long-term growth. These
industries may also require protection in the form of subsidies or tariffs
against imports.
– Chinese firms, aided by the government, have been investing large
sums in developing economies in Africa, Asia, and Latin America.
These firms typically invest in infrastructure, creating opportunities for
long-term trade and growth.
– Privatization can increase productivity and enhance the quality of the
product or service. However, privatization can often lead to companies
ignoring certain low-income markets or the social needs of a
developing economy.
– The free market has its own faults and instabilities. As we saw with
the Great Recession in 2008-2009, increased deregulation can lead to
financial volatility that can infect the entire economy.