4.6. The roles of foreign aid and multilateral development assistance

4.6. The Role of Foreign Aid

Aid is extended to economically less developed countries either by governments of donor countries (official development assistance) or by non-governmental organisations (NGOs)

The aim of foreign aid is to fill the savings gap in developing countries and promote economic development.

Bilateral aid is assistance given by a government of one country directly to the government of another country.

Multilateral aid is aid provided by a group of countries or an institution representing a group of countries such as a World Bank to one of more recipient countries.

Types of Aid

1. Foreign aid: money, food or resources given or lent by one country to another.

2. Official development assistance: aid, which is granted to economically less developed countries by governments, is called.

3. Humanitarian aid: food aid, medical relief and emergency relief aid, which are often provided by nongovernmental organizations (NGOs). NGOs are non-profit, citizen-based groups that are independent of government and aim to provide aid on a small scale to achieve development objectives. Examples of NGOs include Oxfam, Action Aid, Unicef, Amnesty and Greenpeace.

4. Tied aid: one country donates money or resources to another on the condition that the funds are used to buy imports from the donor country or linked to a specific project. For example, Britain granted aid to Malaysia for the Pergau Dam project in exchange for a major arms deal.

5. Project aid: aid, which is given for a specific purpose, including support for schools and hospitals.

6. Programme aid: funding provided for specific programmes, which is dependent on the recipient adhering to specific conditions. This includes support for sectors like the education sector and the financial sector.

Task 1: For the most part, the priority of NGOs is to provide aid on a small scale to achieve development objectives. Complete the following sub-tasks

Task 2: Observe the following graphics below. What conclusions can you come to about global ODA flows?

Task 3: Compare and contrast the extent, nature and sources of ODA of the following economically less developed countries

• Official development assistance (ODA) is defined as government aid designed to promote the economic development and welfare of developing countries. Loans and credits for military purposes are excluded. Aid may be provided bilaterally, from donor to recipient, or channelled through a multilateral development agency such as the United Nations or the World Bank. Aid includes grants, "soft" loans (where the grant element is at least 25% of the total) and the provision of technical assistance (https://data.oecd.org/oda/net-oda.htm).

Effectiveness of aid

Aid is usually most effective when it is targeted to specific development projects and it does not require the recipient country to buy products from the donor countries. It is also important that the recipient government is not corrupt. However, aid is less effective when it replaces domestic investment and enables countries to postpone policies that would improve the macroeconomic environment. Ideally, the technologies introduced should be appropriate, usually labour intensive, in order to increase job opportunities.

Benefits of trade over aid:

• Improves long-term international cooperation as there are mutual benefits. The economic relationships between countries can help to improve political relations as well.

• Encourages private savings and investment by reducing dependence on foreign aid. Whereas countries that become over reliant on foreign aid which could be withdrawn by donors, leaving them in a worse situation as they become unable to sustain themselves and afford their expenditures. Therefore, they go into greater debt.

• The benefits of aid are seriously undermined when corrupt governments are in charge, as the additional income tends to remain within a small percentage of the population.

• Encourages competition, which leads to increased efficiency and innovation. This helps countries to support themselves.

Benefits of aid over trade:

• Aid is necessary in crisis, such as during droughts and tsunamis. It is extremely difficult to trade in these circumstances, as the infrastructure is often very poor.

• Aid is allocated to areas most in need, whereas, trade can lead to wealth be confined within a small group of the population.

• Developing countries do not only need money, but advice, knowledge and resources. Aid can be provided in these different forms, whereas trade requires good infrastructure.

• It can be very destabilizing to introduce a previously insular country to free trade over a short period of time.

Source: http://ibstudy.wix.com/ibeconomics#!46-the-role-of-foreign-aidand-multilate/c1sjf, accessed Tuesday, November 10^th 2015

Task 4: Compare and contrast the roles of aid and trade in economic development

The role of the Bretton Woods organisations -

http://www.imf.org/en/About/Factsheets/Sheets/2016/07/27/15/31/IMF-World-Bank

Task 5: Examine the current roles of the IMF and the World Bank in promoting economic development.

Take note of the following information on the Bretton Woods Institutions and note down 10 key points.

Task 6: What is the effect of multilateral organisations on economic development?

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