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The role of foreign aid
Terms in this set (24)
Non-commercial, concessional assistance given to a LEDC
Can't make money off of it
Must be better for the LEDC than what the market would have provided
Where can aid come from?
- Official Development Assistance (ODA)
- Non-governmental organisation (NGO)
Aid given to a recipient LEDC by a donor MEDC government or a collection of MEDC governments
An organisation that is not linked to any government that gives aid to LEDCs
What are the different types of aid?
- Humanitarian aid
- Development aid
Short term aid given to a recipient LEDC to alleviate short term suffering
Long term aid given to a recipient LEDC to alleviate poverty
Different types of development aid
- Project aid
- Programme aid
- Technical assistance
- Tied aid
Aid given to a recipient LEDC for a specific capital project
Aid given to a recipient LEDC to be used in a specific sector of the economy
Aid given to a recipient LEDC in the form of professional training
Aid given to a recipient LEDC on the condition that a portion of it is used to buy goods and services from the donor country
Why is aid given?
- Political motives
- Economic motives
- Humanitarian/moral motives
Arguments for aid leading to economic development (evaluation)
- Programme aid used for education or healthcare can lead to positive externalities (increase welfare)
- Economic growth (LRAS right) - increased incomes
- If it is allocated effectively, could break poverty cycle (due to investment)
- More equitable distribution of income (lorenz curve)
Arguments against aid leading to economic development
- Political corruption means aid may not be going to right sectors
- Lack of skills - aid may not help if workers don't know how to work technology
- Tied aid → LEDC may buy products they do not need (misallocation of resources)
- Capital may be inappropriate - does not break poverty cycle
- Aid given for economic or political reasons may mean aid is not going where it is most needed
- LEDCs may become too dependent on foreign aid → can't become self reliant
- If it is given as a loan, leads to debt
- Aid is volatile as it depends on the economic circumstance of the country
Conclusion of whether aid leads to economic development
Depends on the type of aid given and the governance of the LEDC.
Aid vs Trade
- Trade, not aid
- Trade AND aid
- Aid for trade
Trade, not aid
Used if aid has failed/trade has succeeded.
Aid may fail if governments misallocate resources and become dependent on aid.
Trade may be successful e.g. through the use of export promotion.
Trade and aid
We should use both to be successful
For aid to be successful, the right type of aid needs to be used and in an appropriate way e.g. direct technical assistance should be given
For trade to be successful, it needs to be used with aid as there is an over-reliance on primary products, MEDC protectionism, lack of capital and low investment - cannot be used on its own in LEDCs today.
Aid for trade
Should be linked together
Aid should be used on technology, education and infrastructure which will all allow the economy to diversify and export secondary products.
Country can grow a comparative advantage in a secondary sector and can undergo export promotion.
However, this may not work if MEDCs protect manufactured industries.
Aims of the International Monetary Fund (IMF)
- Assist the establishment of a multi-lateral system of payment
- Provide resources to members with balance of payment problems
- To facilitate balanced growth and international trade
Aims of the World Bank
- Provide aid and advice to LEDCs
- Reduce poverty
- Encourage and safeguard FDI
THIS SET IS OFTEN IN FOLDERS WITH...
Measuring economic development
The role of domestic factors
The role of international trade
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