FOREIGN AID AND THIRD WORLD DEVELOPMENT

Can Third World countries rely on assistance from developed countries for their development?

Defining Foreign Aid

Organization for Economic Co-operation and Development (OECD) defines Overseas development assistance (ODA) as resources transferred on concessional terms to promote economic development and welfare of people in developing countries Grants are loans offered on very favorable terms to these countries.

Kinds of Foreign Assistance

Development Aid: Transfer of finance, commodities etc. Technical co-operation Debt relief Humanitarian Aid: Disaster relief assistance Military Assistance Food Aid offered to countries facing food shortages

Benefits from foreign development assistance

Foreign Aids supplement local savings Enhances investment which makes possible expansion in productive capacity. It furnishes foreign exchange for essential imports such as machinery fuel and food. Aid builds large construction projects.

Motives for giving AID

Economic objectives (Germany and Japan) A mission to maintain close relationships (France and Britain) Relief and Reconstruction after disasters National Security Concerns (USA)

Motives for giving AID 2

Humane Objectives (Canada, Netherlands and Scandinavian countries) Assist with Democracy and good governance (USA, Britain) Promoting respect for human rights Poverty reduction

Which countries provide AID

Over 95% of ODA now comes from members of the Development Assistance committee (DAC) of the OECD members The OECD comprises 22 developed countries including the European Union

Net official development assistance: Leading donors 19981

Country 1. Japan 2. United States 3. France 4. Germany 5. United Kingdom Volume US$ billion 10.64 8.78 5.74 5.58 3.86 % of GNP 0.28 0.10 0.40 0.26 0.27

Net official development assistance: Leading donors 1998

Country 6. Denmark 7. Norway 8. Netherlands

Volume US$ billion 0.99 0.91

0.80

% of GNP
1.70 1.32 3.04

9. Sweden
10. Luxembourg

0.72
0.65

1.57
0.11

Net official development assistance: Leading recipients 1998

Country Volume US$ billion 1998 2.35 1.91 1.59 1.25 1.25 % of GNP 1997 0.23 2.53 0.39 0.40 2.31

1. China 2. Egypt 3. India 4. Indonesia 5. Bangladesh

Net official development assistance: Leading recipients 1998

Country Volume US$ million 1998 28 million 96 million 80 million % of GNP 1997 85.32 48.6 44.90

6. Sao Tome & Principe 7. Guinea-Bissau 8. Micronesia

9. Guyana
10. Mozambique

95 million
1.04 billion

38.76
29.07

Why the Conditionalities in granting AID to the Third World1

A substitute for collateral assets which private lenders require as a safeguard against danger of default A safeguard against a government that might not be inclined to undertake policy reforms Donors have an obligation to ensure that tax payers monies are effectively disbursed in achieving the objectives for which the aid was given

Why the Conditionalities in granting AID to the Third World2

Conditionalities might tip the balance in favor of officials in a government that favor reforms Can improve domestic economic policies by inducing greater consistency over time. An insurance that might guarantee that reforms and policies might not be reversed in the near future.

Why AID might not be a panacea to Third World Development1

The lack of progress in Third World countries reflects factors that cannot be overcome by aid. Capital can be secured without Aid. Governments who are capable of using capital productively can always attract investment or borrow money from abroad. Aid does not descend indiscriminately on the population who may need it most but goes directly to the government. Aid can therefore increases the patronage and power of an unpopular government.

Why AID might not be a panacea to Third World Development2

Foreign aids enable governments to pursue policies that retard growth and exacerbates poverty Foreign aid makes it easier for governments to restrict internal private investment so to serve their political interests. Aid has often been applied to dictate unpopular and unsuitable external development models.

Why AID might not be a panacea to Third World Development3

Aid breeds dependency and promotes the belief that economic improvement depends on circumstances and influences outside ones control The influx of money from aid drives up the exchange rate and adversely affects inflation at home and foreign trade competitiveness