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WMU ECON 3880 - Foreign Aid

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Chapter 14Test #4: November 20Chapter 14: Learning ObjectivesChapter 14: Summary Outline1.Foreign Aid: IntroductionEconomist Views on Foreign Aid2.Donors & RecipientThree Broad Categories of AID Aid TerminologiesWho Gives AidNet Official Development Assistance in 2004The Commitment to Development Index: Ranking of quality of their Aid policiesAid RecipientsThe Motivations for Aid: Why do nations give aid?The Effect of Aid on Growth and DevelopmentTypes of AidThree Views of Aid- The AID debateDonor Relationships with Recipient CountriesToward Aid EffectivenessFig. 14.1: Total DollarsFig. 14.2: As % of GDPFig. 14.3: Global Trends on ODATable 14.2: Official ODA Regional RecipientsFig. 14.4: Growth & Aid RelationshipFig. 14.5 top: Diminishing returns to Aid- There can be too much aid!Fig. 14.5 The case of no effect of Aid on Growth?Fig. 14.5 The 3 views of the effect of aid on growthFig. 14.6: Food Aid, Prices & ProductionFig. 14.7: Impact of Aid On Investment & ConsumptionSummary of Chapter 14Motivations & Objectives of AidSummary contd.Three Examples of the Effect of Foreign Aid:End Chapter 14Chapter 14Foreign AidNorton Media LibraryDwight H. PerkinsSteven RadeletDavid L. LindauerTest #4: November 20•Chapters 14, 15, 16, 17Chapter 14: Learning Objectives•1. Some on foreign aid: definition, decomposition, the major donors and major recipients. •2.The controversies surrounding foreign aid including its motivations. •3. Three views on aid’s impact on growth and development. •4.The issue of conditionality & the future of foreign aid.Chapter 14: Summary Outline •Donors and Recipients –What Is Foreign Aid? –Who Gives Aid? –Private Foreign Aid –Who Receives Foreign Aid? –The Motivations for Aid •Aid, Growth, and Development –View 1. Although Not Always Successful, on Average, Aid Has a Positive Impact on Economic Growth and Development –View 2. Aid Has Little or No Effect on Growth and Actually May Undermine Growth –View 3. Aid Has a Conditional Relationship with Growth, Stimulating Growth Only under Certain Circumstances, Such as in Countries with Good Policies or Institutions •Donor Relationships with Recipient Countries –The Principal-Agent Problem –Conditionality –Improving Aid Effectiveness1.Foreign Aid: Introduction•Diverse views on Aid: James Wolfenson –World Bank: There is need for more aid Senator Jesse Helms; no US aid should be given to any country.•Massive Historic Aid: Marshall Plan during WW led by USA- made a huge difference in European post-ww2 reconstructionEconomist Views on Foreign Aid•Strong supporter- Jeffery Sachs and Joseph Stigltz•Others such as Chicago school conservative economists- do not care for more aidCase massive Foreign Aid Failure in Africa•Congo/Zaire, Haiti, Zambia, etc•Case success: Botswana, Korea, Taiwan, Mozambique, Uganda, Tanzania.•There is mixed record of Aid effectiveness2.Donors & Recipient•Foreign Aid comprises of financial flows, technical assistance, commodities given by one country to another.•Official definition of foreign aid is by Foreign Assistance Committee (DAC) or OECD-30 industrial countries•Two criteria: promote development and welfare- excluding military aid•Provided as a grant or a subsidized loanThree Broad Categories of AIDAid Terminologies •Official Development Assistance (ODA)-to Poor countries•Official Assistance (OA) to richer states>$9000•Private Voluntary Assistance- includes grants from NGOs, religious groups, charities, foundations, and private companies•Bilateral aid; country to country for example US to Egypt•Multi-lateral Aid from World Bank,UN, IMF to LDCsWho Gives Aid•Mostly Industrial Countries (OECD)•Government Agencies such as: USAID, SIDA. etc•World Bank, IMF, UNDP, Regional Banks•Marshall Plan:( box14.1) The US committed 1.5% of GDP about 10 times as much US aid today.•US official development assistance now is 0.16% of GDP.•Marshall plan was successful because of presence of skilled workforce, financial & legal institutionsNet Official Development Assistance in 2004•See figures 14.1 & 14.2 for absolute and relative figure.•Which country gives the largest Aid in absolute terms? What about in percentage terms?•Global Trends in ODA 1975-2003 (see figure 14.3The Commitment to Development Index: Ranking of quality of their Aid policiesRanking of 21 richest countries by CDI criteria•1. Foreign aid quantity•2. Trade policies•3. Foreign Investment Policies•4. Environmental Policy•5. Security including peace keeping operations•6. Migration-ease of migration•7. Technology-support of Research & Development•Ranking: Denmark #1, USA #12, Japan lower than USAid Recipients•150 Countries Received aid in 2003•Table 14.1 Shows list of recipients who received more than $1 billion•Ethiopia & Tanzania are among the 10 states.•See Official Aid Receipts by region on table 14.2. What region receives the largest in absolute terms? What % of GDP?The Motivations for Aid: Why do nations give aid?•Foreign policy objectives & political alliances•Poverty reduction •Country size; Smaller states more aid•Look for commercial or trade ties•Enhancing Democracy??•Fighting Global Terrorism? Strategic aid.The Effect of Aid on Growth and DevelopmentGenerally, there are 4 Broad of Objectives of Aid•1. Stimulate economic growth through building infrastructure, supporting sectors such as agriculture, technology, new ideas•2. Strengthening education, health, political systems, environment•3. Food aid and other commodities in case of emergencies and disaster•4. Economic Stabilization following natural or man-made shocks.Types of Aid•Emergency and humanitarian negatively associated with growth•Aid that has effect over a long period of time- on health, education, democracy•Aid that directly affects growth inlcudes; roads, electricity, agricultural support, etcThree Views of Aid- The AID debate•View 1; On average Aid has a positive impact on economic development, but not always- especially on health, education, etc( Example eradicating river blindness (box 4.3 in West Africa), Malaria, HIV/Aids, etc•View 2: Has little or not effect may actually undermine growth and development. For example the effect of Food Aid may lower domestic food prices and displace local production see figure 14.4; Create Aid dependency•View 3. The Effect is conditional depending on Good policies, institutions and Good Governance-


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WMU ECON 3880 - Foreign Aid

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