1. Meaning of Foreign Aid External assistance is considered to be a major element towards the advancement of the developing countries. It is said that aid, and not trade, is the engine of growth. The term foreign aid or external assistance or development assistance or development aid is often used synonymously, though there are certain subtle differences in their meanings.

2. In essence, all these term refer to transfer of resources (e.g., loans, growth, technical assistance) from rich to poor countries or from international agencies like the IMF, the WB. To start with, it is better to have a clear understanding of the notion “foreign aid”. Any transfers of capital from one country to another cannot be treated as foreign aid.

3. In the strict sense, all governmental resource transfers from one country to another is to be called foreign aid. And resource transfers by private foreign investors need not to be confused with aid. According to economists, any flow of capital is included within the ambit of foreign aid to LDCs if it satisfies three criteria.

4. Types of Foreign Aid (i) Private foreign direct investment by MNCs/ TNCs and portfolio investment that comprises stock or equity holdings by non-residents in the recipient country’s joint stock companies, and (ii) Public and private development assistance (call it foreign aid) from governments of foreign countries and international donor agencies.

5. FDI is an investment involving the setting up of a new overseas operations or the mergers and acquisitions of controlling interests in an already existing foreign company through the purchase of shares and stocks. On the other hand, portfolio investment is just a transfer of capital through equity holding from one country to another.

6. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-6 Donation of Foreign Aid In monetary value, the U.S. and Japan are the largest donor In percentage of GDP, Sweden and Netherlands are the largest donor In monetary value, FA increased from 1985 to 2005 In percentage of GDP, FA fell from 0.35 in 1985 to 0.23 in 2002, but rose to 0.33 in 2005

7. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-7 Table 14.2 Official Development Assistance Disbursements from Major Donor Countries, 1985, 2002, and 2005

8. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-8 Allocation of Foreign Aid In monetary value some of the largest recipient are China, Israel, Egypt, India, Bangladesh, and Indonesia In percentage of GNI, some of the largest recipient are Mozambique, Nicaragua, Uganda, Ethiopia, and Bolivia

9. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-9 Reasons for FA Donation Economic Assist with economic development and technology transfer Help in case of emergency (e.g., natural disasters) Assist with economic transition (e.g., former Soviet republics)

10. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-10 Reasons for FA Donation Economics: FA fills the Saving gap: causing economic growth Foreign-exchange gap: improving the BOP Technology gap: facilitating industrialization given absorptive capacity limitation

11. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-11 Reasons for FA Donation Political Assist “friendly” government to succeed Promote “national security” by shifting FA from one country or region to another

12. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-12 Criticism of the Donor Countries FA won’t necessarily assist the poor people of the LDCs FA assists non-democratic and corrupt LDC governments FA is just a small percentage of GDP of donor countries

13. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-13 Criticism of the Donor Countries FA is mostly in the form of loans rather than grants; FA is mostly tied FA discourages production, competition, and self-reliance of the recipient nations FA is abused as an election propaganda in both donor and recipient countries

14. World Bank The World Bank is an international financial institution that provides loans to developing countries for capital programs. It comprises two institutions: the International Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA). The World Bank is a component of the World Bank Group, which is part of the United Nations system.

15. The World Bank's official goal is the reduction of poverty. However, according to its articles of agreement, all its decisions must be guided by a commitment to the promotion of foreign investment and international trade and to the facilitation of capital investment

16. The World Bank was established in December 1945 at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. It opened for business in June 1946 and helped in the reconstruction of nations devastated by World War II. Since 1960s the World Bank has shifted its focus from the advanced industrialized nations to developing third-world countries.

17. Organization and Structure: The organization of the bank consists of the Board of Governors, the Board of Executive Directors and the Advisory Committee, the Loan Committee and the president and other staff members. All the powers of the bank are vested in the Board of Governors which is the supreme policy making body of the bank.

18. The board consists of one Governor and one Alternative Governor appointed for five years by each member country. Each Governor has the voting power which is related to the financial contribution of the Government which he represents.

19. The Board of Executive Directors consists of 21 members, 6 of them are appointed by the six largest shareholders, namely the USA, the UK, West Germany, France, Japan and India. The rest of the 15 members are elected by the remaining countries.

20. Each Executive Director holds voting power in proportion to the shares held by his Government. The board of Executive Directors meets regularly once a month to carry on the routine working of the bank.

21. The president of the bank is pointed by the Board of Executive Directors. He is the Chief Executive of the Bank and he is responsible for the conduct of the day-to-day business of the bank. The Advisory committees appointed by the Board of Directors.

22. It consists of 7 members who are expects in different branches of banking. There is also another body known as the Loan Committee. This committee is consulted by the bank before any loan is extended to a member country.

23. Objectives of World Bank: 1. To provide long-run capital to member countries for economic reconstruction and development. 2. To induce long-run capital investment for assuring Balance of Payments (BOP) equilibrium and balanced development of international trade. 3. To provide guarantee for loans granted to small and large units and other projects of member countries.

24. 4. To ensure the implementation of development projects so as to bring about a smooth transference from a war-time to peace economy. 5. To promote capital investment in member countries by the following ways; (a) To provide guarantee on private loans or capital investment. (b) If private capital is not available even after providing guarantee, then IBRD provides loans for productive activities on considerate conditions.

25. Functions of World Bank: World Bank is playing main role of providing loans for development works to member countries, especially to underdeveloped countries. The World Bank provides long-term loans for various development projects of 5 to 20 years duration.

26. The main functions can be explained with the help of the following points: 1. World Bank provides various technical services to the member countries. For this purpose, the Bank has established “The Economic Development Institute” and a Staff College in Washington. 2. Bank can grant loans to a member country up to 20% of its share in the paid-up capital. 3. The quantities of loans, interest rate and terms and conditions are determined by the Bank itself.

27. 4. Generally, Bank grants loans for a particular project duly submitted to the Bank by the member country. 5. The debtor nation has to repay either in reserve currencies or in the currency in which the loan was sanctioned. 6. Bank also provides loan to private investors belonging to member countries on its own guarantee, but for this loan private investors have to seek prior permission from those counties where this amount will be collected.

28. World Bank Group The World Bank is not to be confused with the World Bank Group, an extended family of five international organizations: International Bank for Reconstruction and Development (IBRD) International Development Association (IDA) International Finance Corporation (IFC) Multilateral Investment Guarantee Agency (MIGA) International Centre for Settlement of Investment Disputes (ICSID)

29. Members The International Bank for Reconstruction and Development (IBRD) has 188 member countries, while the International Development Association (IDA) has 172 members. Each member state of IBRD should be also a member of the International Monetary Fund (IMF) and only members of IBRD are allowed to join other institutions within the Bank (such as IDA)

30. Voting power In 2010, voting powers at the World Bank were revised to increase the voice of developing countries, notably China. The countries with most voting power are now the United States (15.85%), Japan (6.84%) China (4.42%) Germany (4.00%) United Kingdom (3.75%), France (3.75%), India (2.91%), Russia (2.77%), Saudi Arabia (2.77%) Italy (2.64%).

31. Under the changes, known as 'Voice Reform – Phase 2', countries other than China that saw significant gains included South Korea, Turkey, Mexico, Singapore, Greece, Brazil, India, and Spain. Most developed countries' voting power was reduced, along with a few poor countries such as Nigeria. The voting powers of the United States, Russia and Saudi Arabia were unchanged.

32. What Type Of Loans Did We Look At? World Bank assessed the conditions contained within current and previous World Bank ‘Poverty Reduction Strategy Credit’ loans for sixteen of the countries assessed. These loans are taken out on an annual basis. For four countries, the study looked at other types of World Bank development policy loans, such as a Development Support Credit or Economic Management and Growth Credit. These loans are also annual loans.

33. WORLD BANK CONDITIONALITY Too many conditions… Eurodad research found that 14 out of the 20 low income countries it assessed have more than fifty conditions attached to each of their current World Bank grants. And 3 out of the 20 have more than 100 conditions. Uganda, where 23% of all children under 5 are malnourished,8 faced the highest number of conditions out of the 20 countries assessed, with 197 conditions attached to its World Bank development grant in 2005. The Ugandan Government faced 87 social and environmental conditions followed by 72 public sector reform related conditions and finally 35 financial and economic reform conditions

34. Number of conditions contained within current World Bank loans to poor countries COUNTRIESWORLD BANK LOAN DOCUMENTYEAR OF LOAN NUMBER OF CONDITIONS UgandaFifth Poverty reduction support credit2005 197 NicaraguaFirst Poverty reduction support credit2003 107 RwandaSecond poverty reduction support grant2005103 SenegalFirst Poverty reduction support credit200577 TanzaniaThird poverty reduction support credit200572 HondurasPoverty reduction support credit200572 EthiopiaSecond poverty reduction support credit200567 BeninSecond poverty reduction credit200560 MozambiqueSecond poverty reduction support credit200559

35. Number of conditions contained within current World Bank loans to poor countries COUNTRIESWORLD BANK LOAN DOCUMENTYEAR OF LOAN NUMBER OF CONDITIONS Madagascar Second Poverty reduction support operation 200557 Niger Public expenditure reform credit 200554 Burkina FasoFifth poverty reduction support operation 200554 Bangladesh Development support credit III 200553 Ghana Third poverty reduction support credit 200552 Mali Public finance management credit 200550 Zambia Economic management and growth credit 200546 Georgia First poverty reduction support operation 200542 Armenia Second poverty reduction support credit 200539 Vietnam Fourth poverty reduction support operation 200538 Bolivia Social sector programmatic development policy credit 2 200533

36. International Monetary Fund The International Monetary Fund (IMF) is an international organization headquartered in Washington, D.C., of "188 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.“

37. Formed in 1944 at the Bretton Woods Conference, it came into formal existence in 1945 with 29 member countries and the goal of reconstructing the international payment system.

38. General objectives of IMF: (i) The elimination or reduction of existing exchange controls, (ii) The establishment and maintenance of currency convertibility with stable exchange rates, and (iii) The widest extension of multi-lateral trade and payments.

39. Functions of IMF 1. It functions as a short-term credit institution. 2. It provides machinery for the orderly adjustments of exchange rates. 3. It is a reservoir of the currencies of all the member countries from which a borrower nation can borrow the currency of other nations.

40. 4. It is a sort of lending institution in foreign exchange. However, it grants loans for financing current transactions only and not capital transactions. 5. It also provides machinery for altering sometimes the par value of the currency of a member country. In this way, it tries to provide for an orderly adjustment of exchange rates, which will improve the long-term balance of payments position of member countries. 6. It also provides machinery for international consultations.

41. Conditionality of loans IMF conditionality is a set of policies or conditions that the IMF requires in exchange for financial resources. The IMF does require collateral from countries for loans but also requires the government seeking assistance to correct its macroeconomic imbalances in the form of policy reform. If the conditions are not met, the funds are withheld. [ Conditionality is perhaps the most controversial aspect of IMF policies.

42. The concept of conditionality was introduced in a 1952 Executive Board decision and later incorporated into the Articles of Agreement. Conditionality is associated with economic theory as well as an enforcement mechanism for repayment. Stemming primarily from the work of Jacques Polak, the theoretical underpinning of conditionality was the "monetary approach to the balance of payments

43. Eurodad research, however, reveals that countries still face an extremely high number of structural conditions. On average, our data showed that countries face around 11 structural conditions per PRGF review. Our data also found that there is a large disparity in terms of the number of structural conditions each country faces within a PRGF loan. This backs up previous Eurodad research on IMF conditionality in 2003, which found that those countries that followed IMF orthodoxy had fewer conditions imposed.

44. Over one third of the countries Eurodad assessed (5 out of 20) faced over 11 structural conditions within their most current PRGF review. Nicaragua, a country where just under 50% of the total population live under the poverty line, faced the most structural conditions with 25 in total as part of its development finance in 2004. This included 17 public sector reform-related structural conditions pushing reform in public finance management, 7 financial and private sector reform conditions and one privatization condition calling for the government to divest its stake in ENITEL, the Nicaraguan telecommunication company.

45. A study undertaken by Danish Institute for International studies noted that Nicaraguan citizens protested at the rise in consumer prices and poor quality of services related to telecommunications companies, following its privatization. This highlights the unpopularity and often harmful impact of privatization. Vietnam also had a high number of structural policy conditions–some 17 structural conditions were listed in its 2002 IMF development finance loan.

46. However, even in more recent PRGF reviews carried out in 2005/6 there are still countries which face high numbers of structural conditions attached to their development finance. Burkina Faso, where 38% of children under five are malnourished, faced 14 structural conditions as part of its development finance from the IMF in 2005; Benin and Niger 13 each as part of their development finance loans in 2005 and 2006 respectively.

47. Voting power Voting power in the IMF is based on a quota system. Each member has a number of basic votes (each member's number of basic votes equals 5.502% of the total votes), plus one additional vote for each Special Drawing Right (SDR) of 100,000 of a member country's quota. The Special Drawing Right is the unit of account of the IMF and represents a claim to currency. It is based on a basket of key international currencies. The basic votes generate a slight bias in favour of small countries, but the additional votes determined by SDR outweigh this bias.

49. International Monetary FundWorld Bank  oversees the international monetary system  seeks to promote the economic development of the world's poorer countries  promotes exchange stability and orderly exchange relations among its member countries  assists developing countries through long-term financing of development projects and programs assists all members--both industrial and developing countries--that find themselves in temporary balance of payments difficulties by providing short- to medium-term credits provides to the poorest developing countries whose per capita GNP is less than $865 a year special financial assistance through the International Development Association (IDA supplements the currency reserves of its members through the allocation of SDRs (special drawing rights); to date SDR 21.4 billion has been issued to member countries in proportion to their quotas encourages private enterprises in developing countries through its affiliate, the International Finance Corporation (IFC) Difference Between IMF and World Bank

50. International Monetary FundWorld Bank  draws its financial resources principally from the quota subscriptions of its member countries  acquires most of its financial resources by borrowing on the international bond market  has at its disposal fully paid- in quotas now totaling SDR 145 billion (about $215 billion)  has an authorized capital of $184 billion, of which members pay in about 10 percent has a staff of 2,300 drawn from 182 member countries has a staff of 7,000 drawn from 180 member countries