Priyanka's Econ Blog

Foreign Aid April 4, 2011

Filed under: Section 5 — priyanka821 @ 1:44 am

1.       Explain the various types of aid which a developing country might receive.

Receiving aid is a growth and development strategy. Countries may receive aid because they are not self-sufficient. There are different types of aid available to a country.

-Bilateral aid: This is when one country gives support to another country directly . It can be done through money support, shipments of machines and tools, emergency aid and sending experts to help.

– Multilateral aid:  This is when a country receives funding from organizations rather than countries . This can be an organization like UNICEF.

-Grant aid: These aids are of money, goods , capital or etc. for which there is no need to pay back. It is more like a gift. For example student grants for studying.

-Soft loans: Loans in which the money is lent to a country on favorable terms.

-Official aid: This is the sum of the bilateral and multilateral aid that a country receives.

-Tied aid: Reciprocal agreements between donor and recipient. It depends on what is asked in return and where the aid is granted.

-Humanitarian aid: This can be both by an individual country or via a major organization such as the UN agencies.

b) “Aid is an effective means of promoting the development of poor countries” Evaluate this statement.

In order for aid to be successful, it should be an attempt to:

Overcome the low savings rations: Most poor people consume the vast majority of what they earn. This leads to the poverty cycle as they cannot invest.

Help reduce foreign exchange outflows: This means that promoting less imports into the country. The domestic government can use the money to build the necessary infrastructure for development of the country which will help it in the long run .

Reduce dependency on private investment: The private investment may not be available or will be found at a cost to the country that requires so much funding. This means that the aid should help the country be self-sustainable.

Improve the living standards of the poorest people: Many times as a country develops the Gini coefficient increases suggesting a more unequal distribution of income even though the country is gaining more national income.  If this continues it can often lead to political unrest.

Moves with the times: What may be a good investment 20 years ago may not be now. Local opinions and knowledge need to increase when deciding what to invest in.

Not simply provide cheap food: The only exception is during an emergency. Providing cheap food hinders the country’s economy as it undermines the domestic agricultural sector. Instead, the aid should be directed at farming equipment or etc. so that the country can be self sufficient. “Don’t give the man a fish, teach him how to fish.”

Allow choice to be exercised by the receiving country: The country should still be able to decide what is going on within it. A problem with tied aid is that it reduces the choices the developing economy gets. It may be more harmful than beneficial in the long run.

Some may argue that aid is a hypocritical way to make the rich richer.

Others may argue that aid is always taken advantage of by corrupt officials : example – Zimbabwe. The inequality has increased significantly.

Loans and grants tied to purchase of Western goods distort economic development in poor counties and increase their dependence on the rich. This means that the country never becomes self-sufficient and is highly dependent on aid.

Furthermore aid goes largely to governments that like capitalism. It allows for private investment which means that some get rich but the bottom of the poorest do not.

However, aid that is tractable and transparent should be effective in helping a country. This means that trade for even the developed countries can increase if we help the poor nations. When the nation is richer and more developed, the people are more likely to buy imported goods thus this will improve the economy of the country that provided the aid. It can alleviate the developed country’s balance of payments. Furthermore, we have a moral obligation to help those in need.  In conclusion aid that is handled well, through transparent means could be very effective in helping a poor country  develop.


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