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A2 Macro – October 2012




Unit 4 Macro: Aid and Development
Financial Flows
Foreign (overseas) development aid

Remittances from migrants

Foreign direct investment (FDI)

Portfolio ...
Scale of Financial Flows
Aid and Private Capital Flows to Developing Countries 2010
                      Flows    US$ bil...
Different types of aid
• Bi-lateral aid: From one country to another
• Multi-lateral aid: Channelled through international...
UK Overseas Aid




    Source: www.guardian.co.uk/global-development/aid
Building the Case for Overseas Aid
   Helps to overcome the         Project aid can fast forward
 savings gap + aid can pl...
Risks and Costs of Overseas Aid
                                      Lack of transparency –
 Poor governance - aid can be...
Paul Collier on Aid
 “There is mounting cynicism about aid—
some of it amply justified by past donor
practices. Yet few re...
Dierk Herzer and Oliver Morrissey
• More often than not aid damages developing countries
• An increase in the aid-to-GDP r...
Dambisa Moyo – Dead Aid
“I have long believed that far from being a
catalyst, foreign aid has been the biggest
single inhi...
Moyo’s Tough Love Approach
“In five years, all aid to Africa
must stop. In its place,
African nations will need to
impleme...
Aid Graduates
Countries whose overseas aid as a share of GDP has declined over the years
Country        Maximum       Year...
Michael Clemens, Steven Radelet, Rikhil
    Bhavani and Samuel Bazzi (EJ, 2012)
The impact depend on policies, ‘deep’ stru...
Duflo and Banerjee – Poor Economics
• Duflo and Banerjee - Poverty Action Lab
                                            ...
Evaluation arguments on aid
• Aid can bring economic, human, environmental benefits
• Development can take place without a...
Breaking out of the aid cycle
                          Sovereign
                           Wealth
                      ...
Tutor2u
Keep up-to-date with economics,
     resources, quizzes and
 worksheets for your economics
            course.
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Aid and Economic Development

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Unit 4 A2 macro - short presentation for use in a class studying the economics of overseas aid

Aid and Economic Development

  1. 1. A2 Macro – October 2012 Unit 4 Macro: Aid and Development
  2. 2. Financial Flows Foreign (overseas) development aid Remittances from migrants Foreign direct investment (FDI) Portfolio capital investment Loans from international institutions
  3. 3. Scale of Financial Flows Aid and Private Capital Flows to Developing Countries 2010 Flows US$ billions % of total official and private flows Total Official Development 128 10.9% Flows Total Private Flows 1042 89.1% (including remittances) Foreign direct investment 509 43.5% Portfolio Investment 128 10.9% Net private long-term debt 84 7.2% Remittances 321 27.4%
  4. 4. Different types of aid • Bi-lateral aid: From one country to another • Multi-lateral aid: Channelled through international bodies • Project aid: Direct financing of projects for a donor country • Technical assistance: Funding of expertise of various types • Humanitarian aid: Emergency disaster relief, food aid, refugee relief and disaster preparedness • Soft loans: A loan made to a country on a concessionary basis with a lower rate of interest • Tied aid: i.e. projects tied to suppliers in the donor country • Debt relief – e.g. cancellation, rescheduling, refinancing or re- organisation of a country’s external debts
  5. 5. UK Overseas Aid Source: www.guardian.co.uk/global-development/aid
  6. 6. Building the Case for Overseas Aid Helps to overcome the Project aid can fast forward savings gap + aid can play a investment in critical key role in stabilising post- infrastructure projects – conflict environments and in capital deepening effects disaster recovery +higher productivity Building a Case for Overseas Aid Long term aid for health and Well targeted aid might add education projects - builds around 0.5% to growth rate human capital and stronger of poorest countries - this social institutions. Aid benefits donor countries too projects for enterprise as trade grows
  7. 7. Risks and Costs of Overseas Aid Lack of transparency – Poor governance - aid can be hundreds of $m spent on aid expropriated and leaves consultants and developed recipient country - aid can country NGOs – many donors finance corruption / strengths forget cost of maintaining a / locks-in ruling elites pet capital project Some arguments against overseas aid Dependency culture – one aid Aid may lead to a distortion of paradox is that aid tends to be market forces and a loss of most effective where it is economic efficiency and risks needed least – it may stunt of inflation entrepreneurial culture
  8. 8. Paul Collier on Aid “There is mounting cynicism about aid— some of it amply justified by past donor practices. Yet few realise just how smart and highly geared modern British aid can be. Perhaps the most sensational recent economic development in Africa has been the explosive growth of “branchless” telephone banking in Kenya. DfID thought up the idea, spent money successfully piloting it, and demonstrated to the private sector that there was a market opportunity. British aid was smart, and thereby catalytic.” Source: Prospect Magazine, 2010
  9. 9. Dierk Herzer and Oliver Morrissey • More often than not aid damages developing countries • An increase in the aid-to-GDP ratio is associated with a long-run decrease in GDP in almost two-thirds of the countries • 3 key barriers to aid effectiveness 1. Religious tensions, which are common in the poorest countries, and a big role for the military in politics 2. Large government, which is often a sign of a large military presence and a corrupt government. 3. Low level of law and order. ‘Law and order’ captures the quality of institutions, which many economists argue are essential to economic development. Better law and order suggests that countries are more open to trade and have better protection of property rights. This gives people the ability and incentives to invest aid money productively in the economy.
  10. 10. Dambisa Moyo – Dead Aid “I have long believed that far from being a catalyst, foreign aid has been the biggest single inhibitor of Africa's growth. Among its shortcomings, aid is correlated with corruption, fosters dependency, and invariably instils bureaucracy that hinders the emergence of an essential entrepreneurial class. For Africa to grow in a sustained way, foreign aid will have to be dramatically reduced over time, forcing countries to adopt more transparent strategies to finance development.” Source: Independent, March 2009
  11. 11. Moyo’s Tough Love Approach “In five years, all aid to Africa must stop. In its place, African nations will need to implement new policies including micro-loans, improved remittances and formalised domestic savings schemes, as well as, internationally, improving foreign direct investment, borrowing responsibly and securing more equitable trading arrangements with the west.” Source: Dambisa Moyo, Dead Aid
  12. 12. Aid Graduates Countries whose overseas aid as a share of GDP has declined over the years Country Maximum Year Minimum aid as % of Year Growth of aid as % of GDP GDP per GDP capita p.a. 1990–2010 Bangladesh 8.2% 1977 1.3% 2009 5.8% Botswana 31.6% 1966 0.5% 2005 7.1% China 0.7% 1992 0.01% 2008 11.6% Ghana 16.3% 2004 4.1% 2008 4.0% India 4.1% 1964 0.1% 2009 7.0% Kenya 16.8% 1993 6.1% 2008 3.1% Malaysia 1.2% 1987 0.07% 2009 6.1% Vietnam 5.9% 1992 2.9% 2008 7.4% Source: World Bank, Global Development Finance
  13. 13. Michael Clemens, Steven Radelet, Rikhil Bhavani and Samuel Bazzi (EJ, 2012) The impact depend on policies, ‘deep’ structural characteristics and the size of the inflow. When aid rises by 1% of a recipient country’s GDP, growth typically rises by between 0.1 and 0.2% within the following five to ten years. This positive but modest effect tends to decrease at high levels of aid receipts.
  14. 14. Duflo and Banerjee – Poor Economics • Duflo and Banerjee - Poverty Action Lab “Precisely because • Have pioneered use of randomised controlled trials to find out what works [the poor] have so in development little, we often find • Test efficacy of projects / interventions them putting much within a population – 2 or more groups careful thought into (inc control) • Many “top-down” aid projects afflicted their choices: They by have to be – Ideology (prejudices, beliefs) sophisticated – Ignorance (info gaps about local economists just to conditions) – Inertia (failure to change when project survive.” does not work)
  15. 15. Evaluation arguments on aid • Aid can bring economic, human, environmental benefits • Development can take place without aid • Well targeted aid can boost growth but the time lags can take years • Aid effectiveness boosted by: – Randomised control trials – Improve transparency of aid budgets – Conditionality linked to improved governance – Aid that stimulates and supports enterprise • Different aid projects can affect growth at different times and to different degrees • Consider alternatives to direct aid – e.g. Debt forgiveness, lowering trade barriers for least developed countries
  16. 16. Breaking out of the aid cycle Sovereign Wealth Funds Formalised Micro- domestic Finance savings Schemes Remittances More from equitable Diaspora trade
  17. 17. Tutor2u Keep up-to-date with economics, resources, quizzes and worksheets for your economics course.
  • AmaraTalib

    Dec. 16, 2018
  • geofkim813

    Feb. 24, 2016

Unit 4 A2 macro - short presentation for use in a class studying the economics of overseas aid

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