IBEconomicsHLRevision Notes4. The Global Economy4.10 Economic Growth & Development Strategies4.10.4 Foreign Aid & Development Assistance

Foreign Aid & Development Assistance (HL IB Economics)

Revision Note

Steve Vorster

Foreign Aid

  • Foreign aid is often offered to developing nations in several different forms, including:

    • Humanitarian/development aid

    • Debt relief

    • Official Development Assistance (ODA)

    • Non-governmental organizations (NGOs)
       

  • Contextual factors can influence the effectiveness of any of these and some that work well in one context may be less effective in another

1. Humanitarian/development aid

  • Two of the most common forms are grants & soft loans
     

An Evaluation of Humanitarian Aid


Advantages


Disadvantages

  • Aid has proven beneficial in times of distress

  • It is particularly helpful in response to large-scale one-off events such as earthquakes or tsunamis

  • Critics argue that aid breeds dependency, corruption & disincentivises individual responsibility

    • E.g. The Central African Republic receives ongoing food aid 

  

2. Debt relief

  • Many developing nations have borrowed significant sums of money in the past which have to be repaid (with interest) over a long period of time

  • The opportunity cost of these repayments is significant & often includes

    • Loss of infrastructure development

    • Inability to create a welfare system

    • Investment in human capital/education

  • Countries began to default on their loans in 1982 (Mexico was the first) & this has led to the restructuring of these loans to make it more affordable

  • More recently there has been significant progress in writing off the entire debt of the most heavily indebted poor countries (HIPC) so that they can focus on building their economies
     

An Evaluation of Debt Relief


Advantages


Disadvantages

  • The actual repayment of debt is removed or reduced

  • The opportunity cost of debt repayments is reduced or eliminated

  • The Government is able to use the money saved to provide new services and additional public/merit goods

  • The country may have a lot more funds available than ever before and this can breed corruption as individuals in government seek to get their hands on it

  • Once the debt is forgiven, many developing nations borrow more money and the cycle starts again

 

3. Official development assistance (ODA)

  • ODA can be bilateral (from donor government to recipient government) or provided through a multilateral
    development agency, such as the United Nations

  • Two of the most common forms of ODA are grants & soft loans

  • The United Nations has set a target for more economically developed countries to spend 0.7 per% of their gross domestic product (GDP) on ODA to help countries eliminate poverty and become developed
      

An Evaluation of ODA


Advantages


Disadvantages

  • Funds are available to the LEDC over a long-term period to help with the economic development goals

  • Bilateral ODA can help to develop the relationship between the two countries, possibly facilitating the exchange of resources, ideas and technology

  • Countries may become dependent on the ODA

  • Corruption may mean funds are diverted from their true purpose

  • ODA in the form of loans has to be repaid and these repayments carry an opportunity cost

 

4. Non-governmental organizations (NGOs)

  • These are typically voluntary, community-based organisations which do not aim to make a profit but seek to meet a need or provide a service

  • They operate locally, nationally and/or internationally

  • With a community based emphasis, they are able to

    • Engage in small scale projects giving control to community stakeholders

    • Draw on local skills

    • Encourage sustainability & remove the need for aid

    • Tackle environmental sustainability using local knowledge & resources 
       

  • NGOs have played a major role in many LEDCs and their aid often comes with fewer conditions or expectations than ODA

  • Examples of NGOs include Oxfam International, Save the Children International and World Vision International
      

An Evaluation of NGOs


Advantages


Disadvantages

  • NGOs can elicit support for particular need from a very wide audience including the global public and many wealthy governments

  • They often have specialists working for them who provide in country support so as to increase the efficiency of their aid

  • They conduct research, gather data and as a result often make highly specific project proposals aimed at directly improving the standard of living

  • NGOs can help develop human skills in the countries in which they work and this helps to break the poverty trap

  • The country receiving the aid can become overly dependent on it

  • The scope of what an NGO can do may be limited or only focussed on one segment of the population e.g children

Multilateral Development Assistance

  • Multilateral organisations are made up of member governments from around the world

    • They pool their resources together which enables large-scale development programmes to be funded

  • The World Bank and the International Monetary Fund (IMF) play an active role in providing multilateral development assistance


An Explanation of Organisations that Assist in Development


Organisation


Explanation of what they do

World Bank

  • Founded in 1944 as the International Bank for Reconstruction and Development to fund postwar redevelopment

  • They provide reconstruction loans to countries devastated by war

  • They provide loans to developing countries to aid in their development

  • They provide loans to countries to assist with the development of infrastructure

  • They work with governments and institutions so as to encourage economic reform and trade liberalisation

International Monetary Fund (IMF)

  • Founded in 1944 with the aim of establishing a stable global financial system that could help with postwar reconstruction efforts and better deal with challenges such as the Great Depression of the 1930s

  • John Maynard Keynes was one of two founders

  • They aim to facilitate a stable global financial system

  • They oversee exchange rates and the system of international payments that occurs between nations and individuals

  • They monitor country policies and national, regional and global economic and financial developments through a formal system known as surveillance

  • They provide member countries with currency to help deal with balance of payments problems

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