1. Chapter 14 Foreign Aid Norton Media Library Chapter 14
Dwight H. Perkins
Steven Radelet
David L. Lindauer

2. Test #4: November 20
Chapters 14, 15, 16, 17

3. Chapter 14: Learning Objectives
1. Some on foreign aid: definition, decomposition, the major donors and major recipients.
2.The controversies surrounding foreign aid including its motivations.
3. Three views on aid’s impact on growth and development.
4.The issue of conditionality & the future of foreign aid.

4. Chapter 14: Summary Outline
Donors and Recipients
What Is Foreign Aid?
Who Gives Aid?
Private Foreign Aid
Who Receives Foreign Aid?
The Motivations for Aid
Aid, Growth, and Development
View 1. Although Not Always Successful, on Average, Aid Has a Positive Impact on Economic Growth and Development
View 2. Aid Has Little or No Effect on Growth and Actually May Undermine Growth
View 3. Aid Has a Conditional Relationship with Growth, Stimulating Growth Only under Certain Circumstances, Such as in Countries with Good Policies or Institutions
Donor Relationships with Recipient Countries
The Principal-Agent  Problem
Conditionality
Improving Aid Effectiveness

5. 1.Foreign Aid: Introduction
Diverse views on Aid: James Wolfenson –World Bank: There is need for more aid Senator Jesse Helms; no US aid should be given to any country.
Massive Historic Aid: Marshall Plan during WW led by USA- made a huge difference in European post-ww2 reconstruction

6. Economist Views on Foreign Aid
Strong supporter- Jeffery Sachs and Joseph Stigltz
Others such as Chicago school conservative economists- do not care for more aid
Case massive Foreign Aid Failure in Africa
Congo/Zaire, Haiti, Zambia, etc
Case success: Botswana, Korea, Taiwan, Mozambique, Uganda, Tanzania.
There is mixed record of Aid effectiveness

7. 2.Donors & Recipient
Foreign Aid comprises of financial flows, technical assistance, commodities given by one country to another.
Official definition of foreign aid is by Foreign Assistance Committee (DAC) or OECD-30 industrial countries
Two criteria: promote development and welfare- excluding military aid
Provided as a grant or a subsidized loan

8. Three Broad Categories of AID Aid Terminologies
Official Development Assistance (ODA)-to Poor countries
Official Assistance (OA) to richer states>$9000
Private Voluntary Assistance- includes grants from NGOs, religious groups, charities, foundations, and private companies
Bilateral aid; country to country for example US to Egypt
Multi-lateral Aid from World Bank,UN, IMF to LDCs

9. Who Gives Aid Mostly Industrial Countries (OECD)
Government Agencies such as: USAID, SIDA. etc
World Bank, IMF, UNDP, Regional Banks
Marshall Plan:( box14.1) The US committed 1.5% of GDP about 10 times as much US aid today.
US official development assistance now is 0.16% of GDP.
Marshall plan was successful because of presence of skilled workforce, financial & legal institutions

10. Net Official Development Assistance in 2004
See figures 14.1 & 14.2 for absolute and relative figure.
Which country gives the largest Aid in absolute terms? What about in percentage terms?
Global Trends in ODA (see figure 14.3

11. The Commitment to Development Index: Ranking of quality of their Aid policies
Ranking of 21 richest countries by CDI criteria
1. Foreign aid quantity
2. Trade policies
3. Foreign Investment Policies
4. Environmental Policy
5. Security including peace keeping operations
6. Migration-ease of migration
7. Technology-support of Research & Development
Ranking: Denmark #1, USA #12, Japan lower than US

12. Aid Recipients 150 Countries Received aid in 2003
Table 14.1 Shows list of recipients who received more than $1 billion
Ethiopia & Tanzania are among the 10 states.
See Official Aid Receipts by region on table What region receives the largest in absolute terms? What % of GDP?

13. The Motivations for Aid: Why do nations give aid?
Foreign policy objectives & political alliances
Poverty reduction
Country size; Smaller states more aid
Look for commercial or trade ties
Enhancing Democracy??
Fighting Global Terrorism? Strategic aid.

14. The Effect of Aid on Growth and Development
Generally, there are 4 Broad of Objectives of Aid
1. Stimulate economic growth through building infrastructure, supporting sectors such as agriculture, technology, new ideas
2. Strengthening education, health, political systems, environment
3. Food aid and other commodities in case of emergencies and disaster
4. Economic Stabilization following natural or man-made shocks.

15. Types of Aid
Emergency and humanitarian negatively associated with growth
Aid that has effect over a long period of time- on health, education, democracy
Aid that directly affects growth inlcudes; roads, electricity, agricultural support, etc

16. Three Views of Aid- The AID debate
View 1; On average Aid has a positive impact on economic development, but not always- especially on health, education, etc( Example eradicating river blindness (box 4.3 in West Africa), Malaria, HIV/Aids, etc
View 2: Has little or not effect may actually undermine growth and development. For example the effect of Food Aid may lower domestic food prices and displace local production see figure 14.4; Create Aid dependency
View 3. The Effect is conditional depending on Good policies, institutions and Good Governance- Example Aid to Botswana has been effective.

17. Donor Relationships with Recipient Countries
The Principal Agent Problem: Aid givers delegate agents which may not promote wishes of the donors especially in the presence of corruption. Who are the agents?
Conditionality: You must do something to get aid. For example, you must liberalize prices and reduce defense expenditures, etc
Improving Aid Effectiveness. How?

18. Toward Aid Effectiveness
Country Selectivity – Give aid to more democratic with good governance &least corruption
Promote participatory approach. How?
Harmonize and coordinate better- several hundred aid missions are in Tanzania and Ethiopia
Result based management- allocate to projects that show results, modify existing programs, Learn from experience , better information

19. Fig. 14.1: Total Dollars

20. Fig. 14.2: As % of GDP

21. Fig. 14.3: Global Trends on ODA

22. Table 14.2: Official ODA Regional Recipients

23. Fig. 14.4: Growth & Aid Relationship

24. Fig. 14.5 top: Diminishing returns to Aid- There can be too much aid!

25. Fig. 14.5 The case of no effect of Aid on Growth?

26. Fig. 14.5 The 3 views of the effect of aid on growth

27. Fig. 14.6: Food Aid, Prices & Production

28. Fig. 14.7: Impact of Aid On Investment & Consumption

29. Summary of Chapter 14
I. Foreign aid is a controversial topic with detractors from the right and left. The text provides various examples to highlight the nature of the public debate. By definition, foreign aid consists of grants or subsidized loans. Aid then falls into three main categories: official development assistance (ODA), official assistance (OA), and private voluntary assistance (PVA). Aid may be pro­vided bilaterally or multilaterally.
The United States has been the biggest absolute donor, but when aid is expressed as a percentage of GDP, the United States becomes one of the smallest donors. In nominal terms, global ODA has increased steadily, but in real terms total ODA was less than the levels of the late 1980s and early 1990s. The largest multilateral agency is the World Bank, but many of its loans are not characterized as foreign aid. Likewise, the International Monetary Fund does not provide much foreign aid. Much of the recent increase in foreign aid has come from private sources.
II. In calculating who receives foreign aid, different measures may be used. These include total aid, aid as a percentage of GNI, and aid per capita. Though these measures may differ, all three indicate that aid does not flow to the poor­est countries.
The motivations for aid may be summarized into five distinct objectives:

30. Motivations & Objectives of Aid
to support foreign policy and political alliances,
to raise income levels and reduce poverty,,
to strengthen commercial ties,
to reward newly democratic countries.

31. Summary contd.
III. Has aid helped growth and development? In order to wade through the literature, the text suggests three viewpoints. In the first viewpoint, aid on average has a positive impact on economic growth and development. To sup­port this stance, the text draws from recent examples on aid helping health, education, and the environment; providing humanitarian relief; and supporting economic and political stability.
In the second view, aid has actually under­mined growth. To illustrate this point, the authors employ the ideas of absorp­tive capacity, aid crowding out tax revenue, and aid dependency.
The third and final viewpoint is that aid has a conditional relationship with growth, helping countries with good policies or institutions. Much of the support for this viewpoint draws from recent empirical research, though the authors indicate the evidence is far from clear-cut.
IV. Other aspects of foreign aid can be gleaned by analyzing donor relation­ships with recipient countries. These relationships can be seen through the recent tool of principal-agent theory since much aid is provided through an indirect and distant relationship. The issue of conditionality lies at the heart of many donor interests, and the text points out that there are shortcomings to conditionality, namely that donors do not follow through on the conditions. The future of aid can be improved through aid effectiveness as in improving the selection of countries, having more recipient participation, increasing coordination among all donors, and basing aid on results.

32. Three Examples of the Effect of Foreign Aid:
There are three examples in the text.
The first describes the Marshall Plan as laying the groundwork for future aid to developing countries.
The second illustrates the “Commitment to Development” Index which rates developed countries on aspects other than giving aid.
The third discusses a success case of aid, the cost-effective multilateral program that treated “river blindness” in 11 West African countries.

33. Economics of Development SIXTH EDITION
End Chapter 14
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This concludes the Norton Media Library Slide Set for Chapter 14
Economics of Development SIXTH EDITION By
Dwight H. Perkins Steven Radelet
David L. Lindauer