Foreign Aid Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2009 AAEC 3204

Objectives Examine nature of Aid flows to developing countries, including the rationale for Aid and the types of assistance to agriculture Discuss the types, objectives, and, effects of food aid programs

What is foreign aid? What are the major types of foreign development assistance? Financial aid Technical assistance Food aid Includes grants and loans with at least a 25% grant element are defined as Official Development Assistance

Nature of foreign aid to agriculture Financial, technical, food Projects and programs Grants and concessional loans Official flows and non-government aid Examples: agr. research and extension projects, irrigation and flood control projects, agr. policy assistance, agr. education and training, direct budgetary support, flood aid.

What Percent of the Federal Budget Goes to Foreign Aid? Foreign Aid 2007 (non-military) = $24 billion Federal Budget 2007 = $2.4 trillion Therefore Aid = 1% of Federal Budget Gross Domestic Product (GDP) = $14 trillion Therefore Aid =.17% of GDP

What is the rationale for foreign development assistance?

Rationale for aid Humanitarian (moral or ethical responsibility to help the poor) Political (strategic self interest) Economic (develop markets)

Rationale for foreign aid 1. Humanitarian (moral or ethical) a. Compensation for past injustices b. Uneven distribution of global natural resources c. Moral obligation to help the poor improve their nutritional status and standard of living 2. Political (strategic self interest) (buy friends) (security assistance) 3. Economic self-interest a. Develop markets for developed country’s goods b. Dispose of surpluses

U.S. Official Development Assistance (ODA) to Top 10 Recipients (Millions of 2000 U.S. Dollars) Country ODA Country ODA Country ODA Country ODA India1625 Israel1553 Russia815 Iraq2,157 Vietnam1227 Egypt1180 Egypt789 Congo, D.R.758 Indonesia912 Pakistan485 Israel555 Egypt724 Pakistan584 El Salvador410 Pakistan428 Russia695 Korea526 India236 Ukraine240 Jordan628 Brazil421 Philippines224 Colombia223 Afghanistan596 Turkey421 Pacific Islands199 Jordan169 Pakistan557 Colombia351 Guatemala186 Yugoslavia155 Colombia506 Israel199 Bangladesh174 Peru154 Israel495 Laos187 Honduras174 Indonesia154 Ethiopia472 Total above6452Total above4821 Total above3682 Total above7,588 Total ODA11689Total ODA12426 Total ODA11163 Total ODA18217

Is foreign development assistance in the economic self interest of both donor and recipient? Usually. Why? Why aid rather than just relying on commercial investment flows? Aid relieves a capital constraint that arises in part due to high risk in developing countries. It can also be tied to technical assistance

How much aid does the United States contribute relative to other developed countries?

United States and World Official Development Assistance (ODA), (Millions of 2000 U.S. Dollars) ( Source: OECD Database) YearTotal ODAU.S. ODAU.S. as % of Total

Trend of total aid and aid to agriculture, Index Total aid Aid to agriculture

Factors affecting AID budgets Deficits in developed countries Geo-political concerns Aid fatigue

Is tying aid to technical assistance, education, infrastructure, or policy change a good idea?

Dateline in development of foreign aid system Rockefeller Foundation mission to Mexico FAO groundwork laid First FAO conference World Bank established Organization of American States formed Truman’s Point Four Speech Act for International Development (AID predecessor) Ford Foundation assistance to agriculture FAO headquarters established in Rome Regional Development Banks UNDP established Consultative Group for International Research formed Gates Foundation initiates significant program in developing countries

Major Development Assistance Programs Multilateral financial network 1. World Bank 2. InterAmerican Development Bank 3. African Development Bank 4. Asian Development Bank 5. European Development Fund 6. United Nations Development Program (UNDP) 7. World Food Programme (WFP) 8. United Nations Children’s Fund (UNICEF) 9. International Fund for Agriculture and Development (IFAD) 10. Organization of Petroleum Exporting Countries (OPEC) 11. Caribbean Development Bank

(Table continued) Bilateral financial assistance 1. U.S. Agency for International Development (AID) 2. Japanese Overseas Economic Cooperation Fund (OECF) 3. Agencies in Germany, France, United Kingdom, and many other countries 4. Nongovernmental Organizations (NGOs) a. Foundations (Gates, Ford, Rockefeller, etc.) b. Cooperative for American Relief Everywhere (CARE) c. Catholic Relief d. Many others

Table 18-4 (cont.) Technical assistance network United Nations Development Program Food and Agriculture Organization of the United Nations (FAO) Bilateral assistance programs listed above Private Assistance International Agricultural Research Centers (IARCs) Many others

Public Law 480 (P.L. 480) What is it?

Food Aid Original purpose: Develop market Surplus disposal Security assistance Meet nutritional needs Promote economic development

How important is food aid? 10% of all development aid but less than 5% of U.S. agr. exports Less than 2% of cereals and 1% of food supply in the United States United States provides about 60% of world food aid Photo courtesy of World Food Program, Brenda Barton

Have food aid levels varied over time? 1954 – 65: Surplus disposal 1966 – 72: Idealistic era 1972 – 75: Cuts and loss of credibility 1976 – present: Increased use of food aid for political purposes and famine relief

P.L. 480 Title 1 Recipient buys grain at 3 – 4% interest (or less) over 40 years Title 2 Gifts, usually distributed through private agencies Title 3 – Added in If recipient can show aid reached the poorest people, loan under Title 1 is forgiven

Food aid distribution in Ethiopia (1983)

Food aid issues Conflicting objectives Surplus disposal Emergency assistance Development Foreign policy Case for food aid Provides resources Helps poor Can stabilize food supply and price Case against food aid Disincentive to provide Dependency Expensive

Conclusion Multiple types of Aid Multiple reasons for giving Aid Positive and negative impacts Can be in best interests of donor and recipients.