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DEVELOPMENT ECONOMICS
This is the fourth and final section of the IB Economics Syllabus. It is quite short, but focuses on the entire world and the challenges it faces today. Poverty, development and aid are key corner stones in this section and builds on all theories you've previously learnt. Many students find this the most interesting!
SECTIONS
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4.1 Economic Development vs Economic Growth
Introductory Video: TED Talk by social scientist Hans Rosling
4.1 Economic Development
Distinguishing between economic growth and economic development is a main IB requirement, as the two concepts may seem interchangeable but have two distinct different meanings. Confusing these two will definitely not make your examiner happy!
Economic Growth vs. Economic Development
ECONOMIC GROWTH
Economic growth solely refers to an increase in a country's GDP. It does not concern itself with living standards or equity, but only on how well the country is performing economically. A country can experience economic growth without economic development, but it is rare to have economic development without any economic growth.
ECONOMIC DEVELOPMENT
Economic development is a of a very multidimensional nature, as it encompasses a large number of aspects of a country's population and infrastructure. It includes reducing widespread poverty, increasing living standards and income equality. The HDI (Human Development Index) can be used to measure economic development, as it includes literacy and mortality rates as well as GDP growth.
Sources of Economic Growth
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Institutional changes. If the state makes changes in taxes, building permits or copyright laws, for example, this might spur economic growth. Property rights are often underdeveloped in less developed countries, so strengthening these will allow more economic growth. Changes to counter corruption will often spur economic growth, as foreign investors now see the country as a more safe bet.
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Increases in quantity and quality of physical capital enables the labour force to make better use of their time. Many developing countryies tend to have a large supply of labour, but lack physical capital to actually use.
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Increases in the quantity and quality of human capital, which is to say increases in population welfare. Developing countries that invest in for example healthcare and education will as a result have a working force in better condition and better educated to handle the working market, thus increasing productivity.
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Development of new appropriate technologies and machinery. This is an important point, especially the word appropriate which has been put in bold. Developing countries often have their own personal needs, and the technology that is considered 'developing' and 'necessary' in other more developed countries can often be wasteful or useless. For example, in a developing country where a majority of the population live in poverty without a way to earn their living, it would be useless to invest in a 3G network covering the whole nation. A more prudent use of the same money would be to develop technologies that help the average citizen go about their day, like the practical real world example illustrated beside!
Characteristics of Less Developed Countries
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Low standards of living
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High rates of population growth and dependency burden (Dependency burden are those who are not in the working force (0-16 and <64))
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High levels of unemployment
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Substantial dependence on agricultural production and primary products.
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Prevalence of imperfect markets and limited informations
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Dominance, dependence and vulnerability in international relations (MDCs dominate due to stronger economics and politics. Difficult to bargain or trade.)
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Often high levels of crime, sometimes a lot of drug use.
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Insufficient provision of education. Earning an income is the greatest obstacle to attend school.
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Urban areas often have better education possibilities than rural ones.
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Prevalence of slums
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Insufficient health care. As a result of this, a lack of vaccines and vaccination children are still today dying of completely curable diseases like measles and polio. Births that aren't attended by skilled health personal is also a big obstacle as many die. Maternal mortality may be low.
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Lack of infrastructure. Transport of capital is much harder and hinders developement. Public utilizes are also poor, like electricity and water. Public services are poor or corrupt; police service and fire service and health service. Postal service, television, communication, Internet, waste management.
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Weak institutional framework and a poor legal system. It cannot uphold property rights such as owning assets. Poor financial system with difficulties to borrow and if they are untrustworthy people will not borrow or lead to capital flight. Microloans could help you see.
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Ineffective tax structure resulting in the government having too little money to invest.
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Main tax revenues from exports and imports because they are easy to collect but hurts free trade. Only the formal market is measured in the GDP. In many LCDs the black markets contain vast sums.
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Polktical instability! Civil war may seriously hinder development. Sierra Leona, Rwanda, Sudan, Syria, Kosovo etc.
The Poverty Trap
The poverty trap is a simple contraption that nonetheless hinders millions of people across the globe to escape poverty. Poor communities cannot invest because of low income - and if there is no investment there can be no growth, thus not leading to an escape from poverty. After all, poverty is the main cause of poverty. It is hard to escape!
The poverty trap is especially pertinant to self-sufficient farmers, who can only farm enough to feed themselves and their family. Because tehre is nothing left over, the can't sell anything at the market to get money, and since they have no money, they cannot invest in buying more seeds, lands or animals to farm - so they cannot produce more.
Low Income
Low Savings
Low Investment
Diversity amongst less developed countries
It's important to realize that less developed countries are all radically different, and one cannot generalize. There is no one-stop solution that will work for all countries!
Resource endowments, both human capital and physical resources. Some countries may be small but have diamons, like Sierra Leon, and some countries may be large and have a huge population as their greatest asset, as with India. For these reasons, there is no solution that would work in both scenarious - their prerequisets are so different.
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Historical background as well as culture plays a large role. Are the countries previous colonies? Religion? Ethnic tensions? Possible conflicts? Border disputes?
Geographic and demographic factors, has to do with both population and country. Size and climate etc. Some countries are suited to growing sugar, some cotton, some lumber.
Ethnicity and religion plays a large role as well. Are there ethnic tensions or possible religious conflicts? That will always hinder development. Examples include Rwanda or Israel's religious claim to Palestinian land.
Political structure is important. Are the countries democractic, theocratic, monarchies, under dichatorial or military rules, ar ethey corrupt or single party states?
Weather and location. This influences what type of crops they can grow, potential natural disasters and if they can host any type of natural tourism, such as skiing, beach tourism or eco-tourism.
4.2 Measuring Development
Composite indicators
Measuring development is very difficult. What constitutes as development? Thus, to try to accurately measure economic development, composite indicators are used to indicate how developed a country is. Composite indicators use a variation of information to create indicators that more accurately measure development than simply GDP. The most commonly used is the HDI, which stands for the Human Development Index. The HDI uses three measures to compose a number, measuring the overall development.
Human Development Index (HDI)
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Literacy rates
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Life expectancy
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GDP per capita
Millenium Development Goals
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Eradicating extreme poverty and hunger
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Achieving universal primary education
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Promoting gender equality and empowering women
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Reducing child mortality rates
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Reduced deaths in childbirth
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Combating HIV/AIDS, malaria, and other diseases
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Ensuring environmental sustainability
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Developing a global partnership for development.
Single indicators
GDP per capita and GNI per capita
Gross Domestic Product (GDP) per capita and Gross National Income (GNI) are two ways of measuring the income distribution and wealth of a country.
Human Development Index Rankings 2015
4.3 Domestic Factors
Factors contributing to development
Education and health
Technology
Credit and Micro-Credit
Women's empowerment
Income distribution
The level of education and health are important when developing a country - if the population is well-educated and healthy, they will be able to work successfully. Higher wages results in better living standards, more tax for the government and more consumerism.
Thus, investing in education and healthcare generally tends to be rewarding for a government. The longer people live, the healthier they are, the more they can work - it's that simple. And it's also a fact in todays world, no matter where you live, that being illiterate is a huge barrier in the employment market.
However, government policies towards improving health care and education tend to be very expensive and can take a lot of time.
Education and Health
Women's empowerment
Women's status in developing countries has been a serious concern now for many years, as arranged marriages, illiteracy and rape often either put their lives at risk or prevent them from making a living for themselves. It is a fact that more boys are sent to school than girls, which blocks them from any chance of learning and eventually getting a proper well-paying job, banishing them to the poverty cycle and in some cases prostitution.
Women make up half the worlds population yet represent 70 % of the poor. Gender equality in the home life as well as on the job market is key to achieve development - it is not possible for a country to only have half of the population educated and working if it is to achieve development and increasing living standards.
Technology
Technology is a very important corner stone in the development of countries, especially using appropriate and sustainable technology. There are many good examples of technological "improve-ments" that turned out to be a complete waste of money. For example, a number of years ago Sweden donated a large number of high-tech ploughs for farming in some of the poorest parts of Africa. Now, these ploughs weren't built for the conditions of the land, the fuel was expensive and hard to find and the upkeep of these machines were much more than the local inhabitants could deal with. It had been much more helpful and prudent to donate 40 oxes - which would have made a real differences as they could pull the makeshift ploughs used before.
Drip irrigation systems, smarter R&D, more farming animals where previously there were none, tools - those are all very real improvements in the poorest areas.
Credit and micro-credit
Having acces to a bank and to credit is very important to achieve development and growth in a country. Without them, investments cannot be made - and without investments development is not too likely. Proper and trustworthy banks also provide an incentive for people to save their money, as well as giving the government an effective tool in controlling interest rathers and thus the economy
Micro-credit is a term for very small loans given to people who would normally not be "trusted" by the larger banks. Micro-credits reach the poor through NGO's, banks, MFI's etc. They target the so called small people, seamstresses, mothers, street-vendors, farmers and so forth, who use the money as an investment possibility. Micro-credit is most often granted to women, as it has been proven that the money will then also be used for the children and is more likely to be re-paid. As a method of development, this is widely discussed.
Income distribution
Income distribution is often worse in developing countries, which have a large informal economy with many under the poverty line, and a small but exclusive elite who are often benefitting from the current political climate. More income equality not only leads to a more stable country, but can also increase growth as more people start to consume. The wealthy often leave the country on vacations or buy expensive imported goods, thus creating a large leak from the circular flow.
Additionally, a more equal distribution of income resulting in higher wages for those most poor usually means they will spend a lot of money in their local area, for example buying more rice or more sending their children to school. This in turn stimulates the local economy, creating even more growth.
Infrastructure
Infrastructure
4.4 The Role of International Trade
"Trade is an engine of growth..." Is it really?
Over-specialization
As developing countries often depend on primary products, they tend to specialize intensly in that field. If a country is for example specialized in coffee, and 40 % of its GDP is generated by it, even a small price change in coffee would make a huge difference to that country.
Additionally, primary products tend to be those that are grown or mined, which means changing the amount produced is not done overnight. Additionally, if that commodity is destroyed by for example bad weather, or simply not in demand suddenly, that country will have nothing to sell. Diversification, eggs in many baskets, keeps a country economically safe.
Price volatility
Primary products often suffer from tremendous price volatility, as they are produced by many different countries and sold to the highest bidder. They also have low PEDs and PES - proving fatal to the countries. For example, if Europe was suddenly experiencing a boom, they wouldn't necessarily buy more coffee - it has a low PED. Price goes up, price goes down, doesn't matter because people want a few cups a day and that's it. What does change is their demand for clothes and material things, which is why for example China booms when Europe and the US does. Additionally, if cocoa is suddenly in high demand, it's low PES means farmers wouldn't be able to produce more in a few years, thus not taking advantage of the temporary price raise.
Developing countries often heavily depend on commodities and primary products
Inability to access international markets
A common and disturbing problem for developing countries is the domination of the Western World and their terms of trade. For example, at big WTO trade meetings the EU as a union has approximately 300 delegates to represent them. A single developing country may have two. A lot of deals are made behind closed doors and while the EU readily grants subsidies to their own farmers, it is generally regarded as an unfair advantage creating dumping when developing countries do it.
Additionally, developed countries impose very high tariffs against developing countries, and developing countries have high tariffs amongst themselves. As a consequence, the developing countries often have to take the deals they get, which are often in the developed countries favor. Another issue is trade escalation: developed countries often offer low tariffs for the raw product, but increase the tariff as the product becomes more and more refined. For example, for Japan, tariffs on processed food are generally 9 times higher than the raw product!
Trade strategies for growth
Import substitution
This strategy is quite simple, and refers to when a country starts to produce goods for its domestic market to take the place of imported goods. For example, if Argentina felt they imported far too many shoes, setting up a shoe factory and producing this for the domestic market would substitute away the imports, creating not only job opportunities and growth but also avoiding trade all together.
Pros:
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Stimulates economy
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Provides diversification
Cons:
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A lot of government intervention needed
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Global misallocations of resources
Export promotion
This is a strategy that requires expanding a countries exports, trying to achieve growth and development that way. This trade strategy, just like import substitution, requires a lot of government intervention to develop a strong manufacturing sector for exporting. Just as with import substitution this creates a more diverse economy, but as with all government interevention has serious opportunity costs.
Trade liberalisation
As the title suggests, this trade strategy has its base in liberalising trade, removing govenrment intervention and as many tariffs as possible. his is a strategy that requires expanding a countries exports, trying to achieve growth and development that way. It includes a number of ideas, like lowering interest rates, free exchange rates, privatisation and deregulation. Many developing countries have attempted to do this, with generally quite positive reviews.
WTO
Benefits of the WTO (directly from the WTO website)*
1. The system helps promote peace
2. Disputes are handled constructively
3. Rules make life easier for all
4. Freer trade cuts the costs of living
5. It provides more choice of products and qualities
6. Trade raises incomes
7. Trade stimulates economic growth
8. The basic principles make life more efficient
9. Governments are shielded from lobbying
10. The system encourages good government
The World Trade Organization is highly controversial, despite its many "benefits". For example, the Uruguay Round increased intellectual property rights, making it much more expensive for developing countries to purchase technology.
Bilateral and regional PTA's
A PTA is a Prefentional Trading Agreement, which has been increasing in the last ten years. These lower tariffs, but don't completely remove them, and also strengthen ties between the countries involved.
These have great potential for increasing development, as allowing more trade and making strong ties results in expanding developing countries markets. This is especially effective when done on a regional level, with countries that have similar characteristics in terms of development. For example, many African developing countries have high tariffs against one another, but new regional PTA's have started to slowly change that, making trade much more feasible.
Diversification
This is a key step, especially as so many developing countries focus all their attention at only one commodity. It is practically impossible to overemphasize this - diversification is so important! You can't have all your eggs in one basket, and neither can a developing country. To grow, a country need to diversy its exports into a variety of markets, as it is more likely to have a sustained growth in several markets. Look at the US, for example. The US exports a lot of technology (Apple and Microsoft, to mention a few) but also a lot of food, especially corn. If food prises rise, thus diminishing America's exports of corn, they still have a strong technological market from which to grow. This makes a diversified country less vulnerable to price volatility.
"New Trade Protection"
An increasing trend the last forty years has been standards on labelling, packaging, technology, labour and environmental impacts that has made it more and more difficult for developing countries to access the international market. The EU, for example, is notorious for holding very high standards on what is allowed to be imported - good for the European consumers, but bad for international exporters from developing countries that cannot afford to comply to those standards.
How trade can negatively affect developing coutnries
Capital Liberalisation
It is important for a country to be able to freely move capital in and out of its borders. Not only does this increase flexibility, but it also allows for the influx of materials needed to manufacture increasingly more complex goods. Capital in the form of money and machinery is also necessary, as it helps spur innovation, investment and manufacturing.
Coffee is one of the most traded commodities in the world, and especially important for as the major export of many African economies.
4.5 The Role of Foreign Direct Investment
This section in the IB Economics syllabus refers specifically to any income flowing from abroad into a country; a foreign source of finance. Foreign flows of income into a country are known as credits in the balance of payments, because they help to manage the debits. Think of it as a normal month for a working adult: income comes in to balance all the coming expenditures. If there's too much expenditures, you end up with debt and a deficit. The same thing applies to countries.
What does foreign sources of finance do?
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They help add to the technological skills of a country.
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Provide the country with foreign exchange.
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Adds to the domestic savings. Many developing countries lack a lot of income, meaning they are incapable of investing on large scales in the country.
Balance of Payments
The difference in total value between payments into and out of a country over a period. A country can therefore have a positive balance of payment (i.e. money left over) or a negative balance of payment (i.e. they are in debt).
Real Life Examples
Chances are that you are already familiar with some of the most well-known multi-national corporations! Here are a few that have both good and bad trackrecords when it comes to foreign direct investments.
Apple
McDonalds
IKEA
What about developing countries do MNC's find attractive?
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MNC's don't just invest anywhere - they chose carefully to avoid losing money and to make a solid return on their investment in the form of monetary profit.
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MNC's prefer to invest in a country with a lot of political stbiality. They don't like countries that could possibly have a coup d'etat or break into a civil war at any moment. Political stability ensures that their investment will be safe the coming years; makes it a long-term sound investment.
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The country should have fairly stable macroeconomic policies: low inflation, stable currency and a good balance of payments.
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A free market economy with little to zero threat of government nationalisation.
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Good institutions and laws that make it easy for the corporation to send profits back home, no restrictions on foreign ownership, low environmental standards, favourable tax standards and
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Large markets and a growing economy.
Foreign Direct Investment and MNCs
MNC stands for Multi National Corporation and refers to firms that are based in one country (the home country) yet produces and is active in other nations. A firm that operates in other countries than the home country, does something called "foreign direct investment" - they directly investment money and capital into another country.
MNCs have grown exponentially in the last fifty-sixty or so years. Today, some MNC's have yearly revenues larger than the GDP of small countries! As of 2008, the top ten MNC's were valued together at a higher price than the total GDP of all Sub-Saharan African countries. Thus, MNC's have a large amount of power in the world today.
Why would MNC's want to expand into developing countries?
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As always, MNC's do this in search of more and higher profits. There are many developing countries that have a large population and a lot of "growth" left to happen, which the MNC's hope to pitch a ride on. China and India, for example, are two huge potential markets where everyone might not already have an iPhone, for example.
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To lower the cost of production. The cost of land and labour vary greatly around the world. Wages in Sweden, for example, are considerably higher than in parts of the developing world, which is why IKEA does not produce its furniture in Sweden although it is a Swedish company.
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Bypass trade barriars that the country in question might have set up, as the cirotaration that produces in that country is allowed acces to local markets. This makes foreign direct investment a possibility to increase markets.
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Raw materials. Some companies need raw materials for their production, and might want to be geographically closer to the source of those materials. The same goes for companies that specificaly spezialize in the production of certain natural resources, such as oil, gas or timber. They will want to explpoit those resources, and might therefore chose to invest in a foreign country.
Is Foreign Direct Investment Good?
ADVANTAGES
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Technology. MNC's might supply technological, manegerial and technical skills and mechanisms into the country. These new technological features and innovative management might be picked up by the country's own companies and labour force.
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Helps promote the local economy. An MNC coming into a developing country through FDI will most likely buy some or all of its materials in the host country. Additionally, the company's management will need to stay in hotels, they will buy food and clothes, the corporation will pay rent for its land and so forth, all beenfiting the local economy.
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Provide employment from the host country's labour force, and therefore contribute with income and less unemployment.
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Government revenue.An MNC might lead to great revenue for the host country in the form of tax, which is a welcome income for poor and developing countries.
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Economic Growth might ensue as a consequences of the MNC's investments in production and industry.
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Balance of payments. Having an MNC in a developing country can help to even out its balance of payments. Since the MNC producing in that country will often be exporting goods and/or services, this will be marked in the country's books as exports (credits) thus balancing out an over-realiance on imports (debits).
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Provide liquidity. If there aren't enough savings in a developing country, then the MNC might flood money into that country and thus boost its domestic investments. The money that the FDI provides, through local employment and so forth, can help boost savings which provides capital for investment and growth.
Advantages of a MNC to the host country
DISADVANTAGES
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No tax revenue for host government. However, many MNC's will not provide a lot of tx revenue for hte government. Au contraire, many MNC's today are attracted to developing nations because of their tax benefits, which they often manage to negoite even lower. This means that the developing country gains fairly little from them and is often afraid of raising taxes in case that might scare them off to other countries.
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No transfer of skills to locals. MNC's might not at all improve technological and managerial skills in the country.This is because many MNC's hire in personnel from abroad, to work as expats in the host country, and thus do not train any local employees.
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No employment benefits. If the above statement is correct in a scenario, then neither does the MNC contribute at all to lowering the host country's unemployment rate.
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Crowd out local industries. MNC's might be determintal to local industry and the local economy. An MNC is often a huge corporation that benefits extensivly from economies of scale. As such, smaller, domestic companies are often incapable of competing and thus go out of business when the MNC arrives.
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Race to the bottom. Another unexpected consequence is that developing countries often attempt to make themselves as attractive as possible to MNCs looking for a host country. They thus begin a "race to the bottom" - lower taxation & so forth.
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Consumption changes. MNC's often fundamentally change consumption in the host country, often to the worse. Many developing countries have long had healthy food standards, but today grow more and more obese because of large Western MNC's that heavily promote and advertise the eating of high-carb, high-meat diets.
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Environmental pollution. MNC's today also often have a lot of dirty laundry when it comes to pollution and environmental standards.
Disadvantages: Shell, oil and the pollution it causes
4.6 Foreign Aid
When aid is given by donor countries, it is called Official Development Assistence (ODA)
Foreign aid refers to any services, funds or assistance given to low income countries. It aims to develop and improve the receiving country, often economically, humanitarian and socially. However, aid can be given for a number of reasons. Firsly, and most obviousl, to aid development but might also be given for political, diplomatic, environmental and personal reasons. It can be given by individual countries or by Non Governmental Organizations (NGO's)
NGOs usually provide aid on a small scale, helping on a local or regional level. They rarely focus on aid to governments but to people. Good examples include Fairtrade, UNICEF and the Red Cross.
Humanitarian aid is a type of aid focusing on filing pressing human needs. It consists of food, water, medical aid and emergency relief, often after natural disasters.
Development aid is a more long-term type of aid, aiming at providing countries with the necessary tools to grow and develop over the long run.
Debt Forgiveness: when richer countries or international organizations like the IMF and the World Bank "forgive" a developing country their debt from a loan. A form of aid.
Offical Development Assistance
The vast majority of ODA is given in the form of grants, and there are three ways it can be given:
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Multilateral Aid: this is when governments give aid to a big international organisation, which then sends the money onwards and distributes it to developing country governments. In this scenario, the governments giving the money have no direct contact or relationship with the receiving government.
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Bilateral Aid: This is the opposite. Aid given directly from the donor government to a receiving government.
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NGO's: GOvernments give money to an NGO, like the UNICEF or the Red Cross, which distribute and use the money in developing countries.
Why do countries give ODA?
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Economic motives: Many ODA's are giving as a sort of long-term investment. Providing money for development to a low-income country near your might make that country stronger economically, meaning they can afford to buy more goods from you. Tied Aid also exists - which is described to the right.
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Political motives: Giving aid to a country, bilaterally, is also a strong way to build diplomatic ties between the countries. It also opens up the playing field for potentail favours from the developing country, for example in the shape of support in the UN. It might also help to forge closer military or economic bonds between the countries, or might be used to make a point on the international stage - i.e. just as a country might impose sanctions on a country for being "naughty", it might give aid to a third country for being "nice". In short, donar countries give aid to countries the have, or hope to have, strong ties.
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Humanitarian motives: It is not to be forgotten that in many developed countries the motives for aid, at least amongst the public, is a moral one - to help give back and to stop misery in the world.
Tied Aid
Tied Aid is a when the ODA given to a developed country is tied: it has to be used in a certain way. Most often, the money has restrictions that mean it can only be used to buy goods and services from the donor country. In essence, many argue that tied aid isn't aid at all - its a subsidy for domestic production for the donar country. In 2006, the OECD estimated that of all ODA's given, only 41.7 % were untied.
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Inefficient. Because the recipient country cannot choose from whom or where to buy the goods, they are bought from a developed country were prices are higher and have to shipped longer. Goods are not bought at world market price but rather the price-point of the developed country.
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Doesn't benefit the local economy. Tied aid does not create jobs for the people to the same extent as tied aid, because all the goods being bought were produced elsewhere.
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Supports the home industry of the donor country - not the developing country. it works as a form of subsidy for the donor country, and does not focus on long-term development objectives.
Problems with Tied Aid
So... how effective are ODA's?
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Can help break people out of the poverty cycle. Because people in poverty and in the developing countries often suffer from the savings-investment trap, where they don't receive sufficient income to invest and grow.
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Can help fight income distribution difficulties. Because aid is often distibuted to the poorest and can help them out of the poverty cycle, it helps with the domestic income distribution and its inequalities.
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Can help provide economic growth because aid sometimes targets small businesses and the poorest. When they get more money in their pockets they can spend more, helping someone else raise their income and so it goes on.
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They can provide basic services that are lacking from the country's own infrastructure, such as give basic access to water, food and healthcare.
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Aid in the form of debt relief is very good, because it works long-term in preventing the receipient country from having to contiounsly spend money on increasing debt and the interest on it that ensues.
The problems with aid
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Tied aid is of limited effectivness and in many ways actully lowers the ability of hte country to focus on its own development goals. Additionally, it functions more as aid for the domestic producers of the donor country and does absolutely nothing for the producers of the receiving country!
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Aid is very unpredictable, and depends on the whims of the donor country. If an election is held and a new party gains majority, the aid budget might be lowered - or increased. This makes it difficult for the receiving country to implement solid plans on how to use the money long-term.
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Conditionality. Many countries give aid with a couple of conditions attached to them, which limit the recipent country's national sovereignity.
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No coordination between different aid projects. In a receipent low-income country, there might at the same time be many different aid schemes, from different countries. Some projects, like a clean water initiative, might be duplicated and uncordinated.
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Aid might substitute domestic resources, rather than boost production You know the old saying - "give a man a fish and he's full for the day, teach him to fish and he's full for life?" sofia hellquv
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Unfourtunetly, aid is often hindered by corruption in the countries it is given to.
A new type of aid
Aid by NGO's
Non Governmental Organizations (NGO's) also give aid. This aid is always given as a grant - not a loan - and is often directed more towards people than to governments. They are private, because they work unaffiliated with any one government. They get their income from private donations but also from government donations.
The NGO's working in the developing world has expanded hugely, and they are becoming increasingly more popular. Many NGO's today also have consultative status within the United Nations and its agencies.
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Provide emergency humanitarian aid, for example after natural disasters like the 2004 Tsunami in Thailand or the earthquake in Haiti.
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Fight for human rights and abuse of those, like Amnesty International.
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Work towards protecting the environment from human abuses, like Greenpeace.
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Work to preserve species and procure their reproduction, like the World Wildlife Fund (WWF).
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Fight against proverty by providing education and support, like Oxfam.
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Try to prevent and treat disease and so forth, like the Red Cross.
What do NGO's do?
How important are NGO's?
NGO's are becoming increasingly important on the world stage, with more and more aid going through them, for a multitude of reasons.
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NGO's truly reach the poor in a way that governments often find it difficult to: NGO's however work closely with them.
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International NGO's that work in many different countries and settings gain experience from many different countries, which means that they have an impressive range of knowledge they can apply to new situations.
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NGO's can be truly innovative in a way that governments cannot be, and aren't bound by traditional rules or norms.
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Because many poor people across the developing world are suspicious of governments, whom they often see as corrupt, an international NGO can work around that.
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However, NGO's can be very small and weak - not all are as big and as powerufl as for example the Red Cross. If they are small, they are easily bogged down by bureucratic things.
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NGO's might be also lose som independence because they easily become dependent on the donors - as governments are giving more and more to NGO's, those NGO's might feel forced to in some aspects conform to their governments wishes.
"Trade, not Aid"
"Trade and Aid"
"Aid for Trade"
Aid or Trade - which is best for development?
Argument supporting Trade INSTEAD of Aid.
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This argument believes in and argues for more free trade, which would allow developing countries to export more of their goods and thus secure reliable incomes for themselves for the long-term. Export their way to economic development, one could say.
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Argues that trade benefits domestic producers, and therefore the population as a whole. It's a more long-term attempt to decrease poverty.
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However, because many developed countries have tariff escalation, it is difficult for developing countries to be able to export.
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More information can be found in the following link: http://www.globalization101.org/trade-not-aid/
Good African Coffee CEO Andrew Rugasira argues for "Trade, not Aid".
Argument supporting Trade AND Aid.
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While trade is important, it is not in anyway sufficient to economically develop a country. Trade and aid instead needs to co-exist and work together to achieve development
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Trade organisations working for this perspe ctive can put pressure on aid organisations and governments to try to make aid more effective, like removing the conditionality of aid, tied aid and so forth.
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At the same time, aid can try to correct some of the issues with international trade, like rich countries giving subisides to there farmers. Additionally, the poverty cycle, countries having little to export and developing countries dependence on commodity exports are things that aid might help to correct to make developing countries more competitive in world trade.
Argument supporting Aid to develop Trade.
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The World Trade Organization supports this view, and has a long section on it on their website.
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Because many developing countries lack the necessary infrastructure and systems to faciliate international trade, aid can help fix that and provide them with the necessary tools to access the world markets.
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For "Aid for Trade", trade and aid need to be incorporated. Very similar to the "Trade and Aid" approch, although aid here is more specifically geared towards trade.
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Micro-loans, access to credit and better infrastructure are all part of the aid needed to be able to better trade.
Trade Aid: How Fair Trade can combine the best of both worlds
TED: How to help Africa? Do Business there!
Multilateral development assistance
Multilateral Development Asisstance is given by big international organisations like the African Development Bank, the Asian Development bank, the IMF and the World Bank
International Monetary Fund (IMF)
The International Monetary Fund was created together witht the World Bank around 1944, because WWII had wrecked such havoc. It was first created to help rebuild Europe, but the Marshall Aid left it useless so it focused more on developing countries.
The IMF is comprised of a majority of the world's countries, and coordinates financial policies across countries. It also - and here's its relevence to this discussion - lends short-term. The thing with IMF loans, however, is that they are heavily conditional. To receive it, a country has to structurally adjust - usually privatise companies, reduce trade barriers and so forth. Many countries have become much worse for it.
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The IMF governing body is many composed of the rich, developed countries, who (as always) set the agenda.
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It interfers in countries domestic affairs, changing their politics and policies. In that way, it is very undemocratic.
The World Bank
The World Bank functions in much the same way as teh IMF, however, gtives more long-term loans. It is owned by its member states, which are roughly 187. It has two parts: on is called the International Bank for Reconstruction and Development (IBRD) and offers commercial loans to middle-income countries. These loans are completely free of any concessions. Most loans are given by the IBRD, which is why the World Bank is not considered an aid organization, but rather - as the name so aptly suggests - a world bank. THe second part of the World Bank does give loans to low-income countries, and are highly conditional!
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Criticised for not caring about environmental and social standards when giving loans to low-income countries.
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Governed and dominated by the rich countries, much like the IMF.
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It's conditions for loans are often very detrimental to the developing nations and does little to alleviate poverty.
4.7 The Role of International Debt
4.8 The Balance between Markets and Intervention
What is foreign debt?
Debt is the the sum of the loans that a country has taken and have yet to repay. Countries can take loans from a number of different places, primarily from other countries or from multilateral organisations like the World Bank or the IMF. The debt must be repayed in the same currency as it was taken in, meaning that currency flucuations can dramatically affect the size of the foreign debt.
Heavily indebted countries
Sometimes, the debt becomes too much for a single country to handle. Not only does the country need to repay the debt, but they also need to pay the interest of the debt which keeps adding up. "The Debt Trap", it has been dubbed, because it is so difficult to get out of - similar to the poverty trap. If they cannot pay, indebted countries often require a rescheduling of the debt and/or get them written off. Otherwise, they will need to make new short-term loans from the IMF or the World Bank, draggin them even further down the debt trap.
How Jamaica became one of the most indebted countries in the world: from the documentary "Life and Debt".
Balance of Payment problems
The debt, and the inability to pay it back, causes severe problems in a country's balance of payments. They, in short, have more debits (spendings) than they have credit (income), which means they have to try to fill the gap. If they don't borrow more, they have to use funds from elsewhere - such as tax earnings. This means that money that could have gone to develop the low-income country and provided important services to the people like healthcare or education have to be used instead. The opportunity cost is very high!
Debt Relief
Debt abolition is very important, since the burden of the debt has lead developing countries to amass huge balance of payment deficits. Since they always have to put money into debt repayment, they cannot focus on development and are contiounsly in the hands of the IMF and the World Bank.
Market-Oriented Policies
Interventionalist Policies
STRENGTHS
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There exists a lot of positive outocomes with market-oriented policies, such as liberalized trade, capitla flows, privatization and deregulation.
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Market-oriented policies tend to empower people and focus on their own ability to make a difference in both their own lives and their countries.
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Resources are more efficiently allocated across the world, and economic growth tends to be one of the accompanying things.
WEAKNESSES
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However, market failures can lead to devastating things, especially in developing countries where there is a lot at stake. This includes but is not limited to environmental degradation, externalities of both production and consumption, a failure to provide public goods.
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Income inequalities might be highlighted.
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Failure of institutions - not all developing countries have the necessary institutions in place to be able to efficiently deal with having a free market.
STRENGTHS
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The ability to correct and control market failures, such as negative externalities of production and consumption that lead to enviornmnetal and social degradation.
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Provision of infrastructure, welfare, education and healthcare that help to fundamentally long-term increase the output capacity of a country.
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The provision of a stable macroeconomic environment that can help companies grow and prosper.
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The provision of a social safety net to protect people from ending up in poverty.
WEAKNESSES
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Intervensionist policies have som downsides, such as excessive bureucracy that eats up government funds.
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Poor planning and corruption can make the model work badly, so if their is no good governance development will likely not happen.
A mix of both perhaps?
Economic development might best be achieved through a complementary approach, involving a balance of market oriented policies and government intervention. Too much government intervention into a developing country might prevent it from managing to grow as effectively as it could with outside money pumped in through international trade. Only free markets, however, might outcompete small producers in the country, putting them into poverty and worsening the situation for many others. A mix is thus needed to achieve economic development but - as always in economics - it depends. It depends on the country. No one is alike and no solution will fit all!