4.6+The+roles+of+foreign+aid+and+multilateral+development+assistance


 * The Basics you need for the exam: **






 * Foreign Aid and Development **

 **Definition of Aid**: "administered transfer of resources from a donor country or international agency or NGO organisation to an LDC to encourage economic growth" or more simply put where one country helps another country through some form of donation. As an introduction to Aid watch this video- __note the different types of Aid given__



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Types of Aid:  Aid can be between two (bilateral) or many (multilateral) countries/institutions.
 * **Bilateral aid** is aid from one country to another. Often this is tied aid when those getting aid must meet certain conditions. An IMF loan with a conditional SAP attached is another example of tied aid (aid which is conditional-so the recipient has to do something in return- such as allowing MNCs, or purchasing supplies from the donor country).
 * **Multilateral aid** is when many countries provide finance which is then distributed- often by an NGO like Oxfam or by International organisations such as the World Bank, The International Monetary Fund or The Asian Development Bank. (see later under Multilateral development assistance.)
 * **Official aid**:The total sum of all Government aid



Argument for tied aid: the donor country ensures aid is used for appropriate purposes and its own economy benefits  Argument against tied aid: The conditions may not be suitable and may harm the country (see IMF conditionality).

  · Aid is used to increase productive capacity and the benefits of resultant growth is widely spread and results in a reduction and elimination of poverty, inequality and unemployment  · Aid represents an injection of resources into the economy that enable investment hence growth, <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> · Aid can help the transmission of new ideas
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Types of Aid **
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Grants which do not have to be repaid
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> Soft Loans: Concessional loans repaid at lower interest rates and over longer periods than commercial bank loans.
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Aid can be in the form of money, goods or technical assistance
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> Aid helps if **

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> · Aid is spent on current consumption <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> · Aid is spent on inappropriate capital as opposed to appropriate technology making intensive use of labour <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> · Aid is spent on ‘showcase’ infrastructure projects that damage the environment and have little impact in raising living standards eg dams <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> · Aid can lead to dependency rather than self-reliance and self-sufficiency. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> ·Aid is in the form free/cheap food in non-crisis situation as the increase in supply reduces agriculture prices for local farmers disrupting markets <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> · If the ‘right’ social, political, cultural and institutional conditions are not in place; <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> · Corrupt governments can intercept much assistance, eg Somalian warloards took aid and fed their armies. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> Aid is unsustainable. What happens when aid stops?
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> Aid hinders if **

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 18px;">AID DATA RESPONSE QUESTION

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> media type="file" key="African Aid Corruption 1.mp4" width="270" height="270"

media type="file" key="African Aid Corruption 2.mp4" width="270" height="270" align="left"

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Student activity. You have 2 double lessons to prepare for a debate. One group will be for and one against the motion which is " we believe that aid is beneficial and should not in any way be conditional" **


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Here are some resources that should help you prepare: **

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">

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<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">www.aidwatchers.com <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">www.aidinfo.org <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">www.oxfamblogs.org/fp2p <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Links: <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">[|Trade v Aid ; is China aiding development in Africa]

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 18px;">The IMF and The World Bank <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Both institutions provide loans to LEDCs but their roles are different:

**<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">The International Monetary Fund (IMF) **

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Established to promote international financial stability. In particular in the past it has lent to member countries with balance of payments problems to: <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">· Restore short run stability and <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">· Support long term adjustment and reform policies aimed at correcting the underlying problems that caused the Balance of Payments and exchange rate problems. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> Given short run balance of payment and exchange rate crisis are caused by underlying problems in the structure of a country, the IMF insists on **Structural Adjustment Programmes (SAPs)** as a condition of help to tackle structural problems within an LDC – **conditionality.** It now has a role overseeing financial stability for all countries both developed and LEDCs. In this way it is fundamentally different from the WB, as the WB is solely a development agency. However their roles have frequently overlapped in recent years. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">In crisis situations member countries seek help from the IMF (eg Argentina in 2002 and Thailand in 1997-8). The IMF (and World bank) offers support conditional on economic reforms as laid out in an SAP eg the LDC must: <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">**- Lower government spending and run balanced budget.** Resultant cuts in education and health reduce welfare and so the costs of adjustment often fall disproportionately on the poorest and most vulnerable in society <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">**- Privatisation of state owned monopolies** eg a 2002 IMF loan is conditional on privatisation of sale of Ghana's water system <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">**Market based pricing** ie end government imposed wage, price, and interest-rate controls and end price control and subsidies. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">**- Raise real interest rates** to market levels <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">**- Liberalise trade** - lower tariffs, end quotas, and remove exchange controls <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">- Consult with civic society to ensure ownership of the development process is widely shared. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">IMF loans can help in the process of removing structural weaknesses in an economy and so ensure long run balance of payments and exchange rate stability.
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Conditionality refers to the requirements imposed by the IMF on countries as pre-conditions for loans. **


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Critics of the IMF argue: **

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">**Are the pre-conditions in place** before an IMF loan is given? Eg good governance: The authorities in Russia say around $4bn of IMF funds lent to the country in late 1990s have been embezzled. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Eg:Nigeria is withdrawing from an IMF monitoring arrangement and is aiming instead for a home-grown economic programme that better serves its people. (Source: BBC). The poor suffer when "market prices" and privatised monopolies mean that necessities rise in price. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">**IMF policies (Washington consensus) benefit rich countries more than poor.** Free trade and privatisation helps MNCs gain access to LEDC markets. Moreover free market pricing leads to consumers paying higher prices and higher profits for MNCs.
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> It has moved from balance of payments support to being a dictator of so-called "sound" economic policies. And yet the IMF did not criticise DCs for massive amounts of intervention during the economic crisis of 2008 onwards. **
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Are the costs of adjustment too high? **


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Defending the IMF: **

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> - IMF short-term loans help stabilise exchange rates and the BoP for a country in crisis – for now. Such intervention has no impact on the underling reasons for crisis. Unless action is taken to resolve the economic factors that caused the BoP deficit and exchange rate crisis, then future IMF intervention may be required. That is why IMF loans are conditional on SAPs/PRS. **SAPs enable a country to go through a painful adjustment process and through reform achieve a stable exchange rate and BoP position.** And independence.


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Conclusion: A view has to be taken as to whether the costs of transition are worth the eventual gains. **

**<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">World Bank and Development **

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">The World Bank ("WB") was established to promote post-war reconstruction and the flow of capital to developing countries.Its 188 member countries own it. The WB promotes the institutional, structural and social development of LEDCs


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">The WB comprises several separate institutions; the three main ones are described briefly below: **


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">1).The International Bank for Reconstruction and Development (IBRD): **<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">IBRD raises most of its funds on the world's financial markets.The income that IBRD has generated over the years has allowed it to fund development activities and to ensure its financial strength, which enables it to borrow at low cost and offer developing countries (note we are not talking about LEDCs here!) good borrowing terms. Note that it is not strictly development aid as the **<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">IBRD is simply lending to governments at the low rates it is able itself to gain **<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> due to the IBRD's size and status in financial markets


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">2).The International Development Association (IDA) **<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> **provides long-term loans at zero interest to the poorest LEDCs) for projects that address peoples' basic needs eg, primary education, basic health services; clean water and sanitation.** Since 1960, IDA has lent $135 billion and lends about $6-7 billion a year for domestic development projects. This is technically counted as aid as these are “soft loans”. But this accounts for less than 25% of the total loans of the World Bank and so you could argue the WB is not primarily an aid agency

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">(1) Finances private sector projects in LEDCs <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">(2) Helps private companies in the LEDC raise finance in international financial markets and <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">(3) Offers advice
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">3).The International Finance Corporation (IFC) is the private sector arm of the World Bank that: **


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Note that you don’t need to know this detail but you do need to know that WB has in the past insisted on structural adjustments as condition for loans. Since the mid-late-1990s this policy has softened as the WB has seen a growing role for Government intervention in promoting Economic development **


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Arguments in support of the World Bank **

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Supporters of the WB argue loans and aid alone do not guarantee growth or the reduction of poverty. Unless LEDCs act to introduce good governance, the Washington Consensus measures of getting prices right, ensuring macroeconomic stability and opening up trade, and involve all stakeholders in a country then the underlying problems of the country remain unresolved. Further loans would be ineffective and damaging. The WB has no option but to demand painful short-term reform on LDCs for long term prosperity

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Social and Environmental concerns often ignored when loans are given. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">WB and IMF dominated by rich countries <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">The burden of structural adjustment involved falls disproportionately on the most vulnerable in society <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> Poverty is still widespread in countries following HIPCs <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Aid <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 15.555556297302246px;">or cancelling third world debt r <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">ather than loans is more efficient use of WB resources. But WB and IMF through the HIPC have finally done this- much of the debt owed to WB and HIPC has been cancelled.
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Criticisms of the World Bank **