Official Development Assistance ODA Usually government to government donations Given with the intention of promoting economic welfare and 01 09 2016 development Must be at least 25 grant Only developing countries are eligible Specific ODA Projects Transportation and infrastructure Energy generation and distribution Agriculture Education Disease prevention Budget support Why Give Aid Strategic motives o Gain support of government useful for support at UN other cooperation o Gain support of population soft power o Stabilize important regions o Control diseases that might otherwise spread o Create new trading partners o Can force policy changes by making aid conditional Altruistic motives o Genuine desire to alleviate poverty other problems Scandinavian countries very altruistic US very strategic others somewhere between Is Aid Effective Success o Hard to see we don t know how much development there would have been without aid o Significant progress in alleviating hunger o Increases in literacy rates o Becoming more transparent accountable locally targeted o Corruption conflict often diverts aid from intended purpose o Disincentives good policy entrepreneurship o Creates cycle of dependence o If given for strategic reasons doesn t necessarily go to areas Challenges of greatest need The World Bank Created at Bretton Woods Originally helped finance reconstruction of Europe following WWII Now coordinates multilateral aid projects Provides low interest loans Encourages private sector investment in developing world Provided 31 billion in aid in 2013 Member states contribute budget vote shares based on donations US Mortgage Crisis Price bubbles occur when the true value of something isn t known o Pre 2008 unclear exactly how much demand for housing there was in US As upper and middle classes settled into homes lenders began providing mortgages to less wealthy clients sub prime mortgages Since house serves as collateral mortgages generally very safe investment Investors create financial products collection of stocks loans futures with a mix of risky high reward and safe lower rewards components o Sub prime mortgages were used as the safe part o Products sold to retirement funds university endowments etc Works great while housing prices are stable or increasing Housing bubble burst many homes now worth less than mortgage People stopped paying o Even if house is seized and resold these mortgages guaranteed to lose money Mortgage backed securities suddenly worth less and much riskier than originally thought lose lots of value Mortgage Crisis Banking Crisis Many banks had invested large portions of their assets in mortgage backed securities Some lost so much money that they were unable to return deposits o Bear Stearns and Lehman Brothers went bankrupt Those that survived had no cash to give new loans liquidity crunch Economic activity that requires borrowing grinds to a halt recession Goals of Policy Response o Borrows w bad credit forced to pay high interest Prevent banks from failing assets deposits from being lost Provide banks with enough liquid capital to resume normal lending Signal to consumers and investors that the problems are being solved that it s safe to resume normal activity Direct new investment to areas that will produce rapid growth and job creation Avoid moral hazard discourage behavior that led to crisis Avoid picking winners and losers