Development Economics – Charmaine Neo Ning Fang 12CMcECONOMIC DEVELOPMENT..................................................................................................................................1MEASURING DEVELOPMENT...............................................................................................................................4DOMESTIC FACTORS AND ECONOMIC DEVELOPMENT......................................................................................7INTERNATIONAL TRADE AND ECONOMIC DEVELOPMENT.............................................................................10FOREIGN DIRECT INVESTMENT AND ECONOMIC DEVELOPMENT.................................................................14AID, DEBT AND ECONOMIC DEVELOPMENT....................................................................................................15THE BALANCE BETWEEN MARKETS AND INTERVENTION.............................................................................16

Economic development Economic growth – increase in real output of an economy over time Sources of economic growth

o Natural factors Anything that could increase the quantity / quality of a FOP

should lead to an increase in potential growth Quality of the land may be increased by fertilization, better

planning of land usage, improved agricultural methods & building upwards

o Human capital factors Could be increased by encouraging population growth /

increasing immigration levels & by improving quality by improving health care, improving education, vocational training & re-training for the unemployed + provision of fresh water & sanitation.

o Physical capital & technological factors Definition of physical capital: factory buildings, machinery, shops,

offices & motor vehicles Quantity of physical capital is affected by the level of savings,

domestic invesments, government involvment & foreign investment

Quality can be improved by higher education, R&D, access to foreign technology & expertise

Capital widening: when extra capital is used with an increased amount of labour but ratio of capital per worker does not change. Total production increases but productivity is likely to remain unchanged.

Capital deepening: increase in amount of capital for each worker & thus this often means there is an improvement in technology & will usually lead to improvements in labour productivity & total production

o Institutional factors E.g. adequate banking system, structured legal systems, good

education system, reasonable infrastructure, political stability & good international relationships.

Does economic growth lead to economic development? o Higher incomes

It depends on the distribution of income (whether it is fair) o Improved economic indicators of welfare

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Could be linked to increased average life expectancy, average years of schooling & literacy rates.

o Higher govt revenues The government will gain increased tax revenues & be in a better

situation when it comes to the provision of essential services (e.g. education, health care & infrastructure)

o Creation of inequality Rich get richer & poor get poorer. Even if the poor get some

money, the gap is said to grow with the rich getting the majority of the gains. It does not mean that the rich spend more & some of this goes to the poor

o Negative externalities & lack of sustainability Often leads to pollution as incomes rise, people drive cars, enjoy

plane travel & buy goods that are imported across long distances. This creates negative externalities of consumption & production where market prices of goods & services do not reflect full costs to society & environment. It could also lead to problems of deforestation, soil degradation & reduction in bio-diversity

Lead to increase in burning of fossil fuels as demand for energy increases. Results in large emissions of CO2 and global warming. Forests, coral reefs & other ecological systems will be damaged as a result of their inability to adjust to changing temperature & precipitation patterns. Access to safe water will become more precarious. Tropical diseases spread further north. Droughts will become more intense & frequent, food production in middle & high latitudes becomes easier but this is no gurantee that the risk to food security will lessen. Rising sea level with floods.

Uneconomic growth – when increases in production come at an expense in resources & well being that is worth more than the items made.

Sustainability – the ability to meet the needs of the current generation without compromising the ability of the future generations to meet their needs. (compromising the living standards of future generation)

Common characteristics of developing countries o Low standards of living

Low incomes Inequality Poor health Inadequate education High infant mortality rates High levels of malnutrition

o Low levels of productivity Due to low education standards, low level of health amongst

workers, lack of investment in physical capital & lack of access to technology.

o High rates of population growth & dependency burden Definition of crude birth rate: annual numbers of live birth per

1000 of the population [crude birth rate in developing countries is high]

High dependency ratios (many young people) & thus those of working age have to support a much larger proportion of children then the work force in developed countries

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old agedependency ratio=(% of population

65)

(%of population15¿64)

child dependency ratio= (% of populationunder 15 )(% of population15¿64 )

o High & rising levels of unemployment & underemployment Firstly, we have to worry about those who have been

unemployed for so long that they have given up searching for a job & no longer appear as unemployed.

Secondly, there are the hidden unemployed who work for a few hours on a family farm / family business / trade of some sort and do not appear as unemployed

Lastly, there are the underemployed. Those would like to work full time but are only able to get part time employment often on an informal basis.

o Substantial dependence on agricultural production & primary product exports

Over dependence on primary product exports o Prevalance of imperfect markets & limited info

Developing countries lean towards more market orientated approach to growth but this can be troublesome as market based approaches may work well in economics where markets are efficiently functioning but not in developing countries faced with imperfect markets & imperfect knowledge.

Lack of functioning bank system – discourages savgins & investments

Lack of developed legal system Lack of adequate infrastructure – for efficient & low cost

transport & FDI. Lack of accurate info – imperfect info & misallocation of

resources & misinformed purchasing decisions o Dominance, dependence & vulnerability in international relations

Dominated by developed countries Dependent on developed countries (trade, access to technology,

aid & investment) Vulnerable on international stage & are dominated and harmed

by decisions of developed countries over which they have no control

Diversity among developing countries o Resource endowment

It is common for human resources to be undernourished & poorly educated and low skilled however endowment in terms of physical resources can vary immensely between developing countries.

They could be poorly endowed with physical resources but have abundances of natural resources / synthetic resources

o Historical background Colonization Depends on the length of time that the countries were colonized

& whether the eventual independence was given freely / it had to be fought for.

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Historical diff – set countries apart culturally, socially, politically and economically.

o Geographic & demographic factors Diff geographical & population size Not all developing countries have large populations

o Ethnic & religious breakdown High levels of ethnic & religious diversity could increase the

chances of political unrest & internal conflict o Structure of industry

It is widely assumed that all developing countries depend upon the production & exportation of primary products but some may depend on exportation of manufactured products and some are mainly exporters of service (in the form of tourism)

o Per capita income levels Marked diff in per capita income from developing country to

developing country o Political structure

Varying political structure Democracies Monarchies Military rule Single party states Theocracies Transitional political systems – country is in transition

conflict & civil war MDG (millenium development goals)

o Eradicate extreme poverty & hunger o Achieve universal primary education o Promote gender equality & empower woman o Reduce child mortality o Improve maternal health o Combat HIV / AIS, malaria & other diseases o Ensure environmental sustainability o Global partnership for development

Measuring development Poverty traps / poverty cycles

o Relative poverty – comparative level of poverty if they do not reach a specific level of income

Depends upon where the specific level of income is set o Absolute poverty – measured in terms of the basic necessities for survival

level of income needed to buy items such as basic clothing, food & shelter

If they are below a certain level (e.g. 1.25)

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Poverty cycle – development traps

Single indicators – solidarity measures that may be used to access development o Financial measures

1. GDP & GNI per capita GDP per capita – total of all economic activity in a country

regardless of who owns the productive assets, divided by the number of people in the population (e.g income of foreign companies producing within a country would be included in the national income of that country but activity of its own companies producing outside the country would not)

GNI per capita – total income that is earned by a country’s FOP regardless of where the asset is located divided by the number of people in the population. (e.g income of foreign countries producing within a country would not be included in the national income of the country but the activities of its own companies producing outside of the country would)

If there is large amounts of FDI then GDP figures will be higher than GNI since they will include profits that may well have been repatriated. Thus, GNI figures tend to be used to measure the status of developing countries

2. GDP per capita & GDP per capita at PPP (purchasing power parity)

G&S don’t cost the same amount in diff countries and thus purchasing power of a person’s income will be diff in diff countries

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Therefore the PPP exchange rate is used as it attempts to equate the purchasing power of currencies in diff countries by comparing the prices of identical G&S in diff countries

Health measures 1. Life expectancy by birth

a. Average number of years that a person may be expected to live from the time that they are born.

b. Factors: level of health care & health care services; provision of clean water supplies & sanitation; provision of nationwide education; supplies of food; diets & lifestyles; levels of poverty; level of conflict.

2. Infant mortality rate a. Measure of the number of deaths of babies under the age

of 1 year per thousand live births in a given year Education measures

1. Adult literacy rate a. Measure of the proportion of the adult population, aged

15 or over, which is literate expressed as a percentage of the whole adult population for a country at a specific point of time

b. Influenced by the above factors + distribution of income within the country

2. Net enrolment ratio in primary education a. Measure of the ratio of the number of children of primary

school age who are enrolled in primary school, to the total number of children who are of primary school age in the country

Composite measures 1. HDI

a. Life expectancy at birth - Long and healthy life b. Education – adult literacy rate combined with a measure

of primary, secondary and tertiary school enrolment c. Decent standard of living – GDP per capita

HDI comparing with GDP per capita, we can make conclusions about the country’s success in translating the benefits of national income into achieving economic development.

We cannot use only GDP per capita to measure development HDI is to reemphasize that people and their capabilities should be the ultimate

criteria for assessing the development of a country not economic growth Other indicators of development

o HDI is still an average figure that can mask inequalities within the country (e.g. inequalities between rural and urban citizens, between men and women, between diff ethnic groups)

o Gender related development index (GDI) Same indicators as HDI but takes into account the inequalities in

these indicators for women and men. o Gender empowerment measure (GEM)

One aspect of development takes into account developing self esteem & creating opportunities & freedom for all people therefore it is valuable to measure whether development in a country is helping to create such freedoms and opportunities for women.

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Measures the extent to which women are able to actively participate in economic & political life + number & percentage of women in leadership, managerial & parliamentary positions & in technical & professional jobs. It examines the participation in the labour force & share of national income

o Human poverty index (HPI) Measure the level of deprivation & poverty Looks at the proportion of the people who are deprived of the

opp to reach a basic level in each area Looks at indicators that are comparable with the HDI HPI is useful for observing how evenly the benefits of

development are spread within the cotunry and is expressed as a percentage

o Genuine progress indicator (GPI) Measure whether a country’s growth (an increase in the output

of G&S) has actually lead to an improvement in the welfare of the people

To the GDP figures, it adds a non-monetary benefits such as the benefits of household work, parenting & volunteering work

Given that economic growth generates many costs an indicator of GPI will deduct such costs:

Environmental costs Resouces depletion Social costs – loss of leisure time, crime etc Commuting costs Costs of automobile accidents

Domestic factors and economic development Institutional factors affecting development

1. Education a. External benefits b. More efficient work force c. More discussions and debates thus leading to social

changes. i. Improve the role of women in society

Recognise political, economic and social participation and leadership of women

ii. Improve levels of health People especially women are able to

communicate more fully and become aware of some of the hazards that face them & the opp that exist. They are able to read about & be informed about dangers such as HIV / AIDS, poor sanitary habits and poor dietary habits. They are also able to find out about things such as innoculations & water filtering

iii. Large funds are required & there may be large disparities in the provision of education with urban areas receiving more funding then rural

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areas and there are family economic conditions that prevent children from entering school

2. Health care a. Training b. Health facilitiesc. Provision d. Availability of immunisations

3. Infrastructure a. Essential facilities & services such as roads, airports,

sewage treatments, water systems, railways, telephone & other utilities that are necessary for economic activity

4. Political stability & lack of corruption a. Citizens are more likely to have an input in running the

country b. The government’s planning is likely to be more

structured & long term and the law is easier to enforce. c. When there is corruption ( the dishonest exploitation of

power for personal gain) i. Government spend large amounts on large scale

capital investment projects ii. Official accounting practises are not well

formulated / controlled iii. Political elections are not well controlled (no

democracy) iv. Weak legal structure & lack of freedom of speech

d. Forms of corruption & effecti. Electoral corruption – government is not voted

for by the majority & they will not put into place policies that are for the benefit for the electorate

ii. Unfair allocation of resources – market failure & resources are misallocated. It often sustains inefficient producers, shielding them from competition

iii. Bribes increase cost of business thus higher prices

iv. Reduces trust in economy – harder to attract FDI v. Increases risk of contracts not being honoured

thus deterrent to investment both internal & external

vi. Reduces quality of government services to people as they divert public investment into capital projects where bribes are more likely.

vii. Turn blind eye to regulation viii. Capital flight – monetary gains from corruption

are moved out of the country & reduces capital available for internal investment

ix. Constant paying of small bribes reduces economic well being of an ordinary citizen

5. Legal system a. To enforce contracts b. To uphold property rights

i. Right to own assets (buildings) ii. Right to establish the use of our assets (e.g.

adding to the building – sanitation)

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iii. Right to benefit from our assets iv. Right to sell v. Rights to exclude others from using / taking over

c. If they are not guranteed the ownership, they will not improve the property & there is reduction in investment & growth and economic growth

6. Financial system, credit & micro-finance a. Savings is necessary for funds to be available for

investment. If the financial institutions are weak & untrustworthy, people tend to buy assets / invest their money outside of the country

b. Financial systems are necessary if low income people are to be able to manage their assets & to allow them to increase in value thus enabling them to invest in things (helath care, shelter & education)

c. Saving & borrowing money is the breakout point of the poverty cycle

d. It is difficult to start a business due to the lack of funding. e. Micro-finance is the provision of financial services (small

loans, savings accounts, insurance & cheque books) geared specifically to the poor

7. Taxation a. Difficult for governments to collect tax revenue in

developing countries – lack of inefficiency, information and pure corruption

b. Corporate taxes tend to be low since there are relatively little corporate activity in developing countries & they offer large tax incentives in order to encourage domestic corporate activity & to attract FDI

c. Export, import and excise (customs) duties – relatively easy to collect since they are paid when the goods goes through the country’s border posts. But only significant if the country is heavily involved in foreign trade.

d. Size of informal markets – lower tax revenue and if incomes are not recorded, tax is not collected thus making it difficult for govt.

8. Use of appropriate technology a. Technology that’s appropriate for use with existing factor

endowments b. There is often a surplus of labour & thus it would be

appropriate to make use of the abundant labour supply c. Giving workers capital equipment that are cheap to make

and requires labour to make use of it. 9. Empowerment of women

a. Improve through education and improved social standing i. Well being of family is improved (health of

children as women are better informed) ii. Education of children in family improve

iii. Quality of workforce in the country improvesiv. More control over contraception, marry later and

tend to have smaller families thus reducing population growth

10. Income distribution a. Income inequality

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i. Low levels of savings ii. Low investmet

iii. Rich dominate politics & economy thus we do not have pro-poor growth (economic growth leads to a fall in some agreed measure of poverty thus benefitting the poor)

iv. Rich move large amounts of funds out of the economy in the form of capital flight.

v. Large proportion of goods purchase by rich are foreign produced & consumption does not really help the domestic economy

International trade and economic development International barriers to development

1. Over specialization on a narrow range of products a. Many developing countries are dependent on primary

commodities for their export revenues and rising commodity prices will be beneficial to these countries as it increases their rate of economic growth & could start a positive cycle. However if prices fall, there will be a deteriorating terms of trade (export price relative to import price) & current account deficits are likely to increase and it will be difficult to finance current expenditure and necessary imports.

b. They face great vulnerability and uncertainty (e.g. economic growth dependent on tourism will be affected if there is terrorism / global slowdown in economic growth / natural disasters)

2. Price volatility of primary products a. Price elasticity of demand & price elasticity of supply for

commodities tend to be relatively inelastic and thus change in demand/supply will lead to large fluctuations

3. Inability to access international marketsa. If protectionist measures (aimed at support domestic

producers at the expense of foreign producers) prevent developing countries from utilizing their comparative advantage & exporting to develop countries then they will be limited in their ability to earn foreig exchange

b. Especially harmful for primary product makers – developed countries export the surplus to the developing countries and lower world prices thus damaging prices & local supplies thus there is an argument of “dumping”

c. Tariff escalation (e.g. in agricultural markets of meat, cocoa)

i. Rate of tariffs on goods rises the more the goods are processed.

ii. Importing country protects its processing & manufacturing industries by putting lower tariffs on imports of raw materials & components & higher tariffs on processed & finished products.

iii. There is little incentive to diversify away from producing raw materials to processing them as

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the higher prices due to tariffs will make their processed goods uncompetitive.

iv. This reduces the imports of the more important processed goods & their final processing is done in developed countries & since these add the highest value to the product in terms of the price at which it is sold, this is where the largest gains are to be made.

v. Many of them have non-convertible currency and this can only be used domestically and not accepted for exchange on foreign exchange markets. Most developing countries adopt a fixed exchange rate system where the domestic currency is pegged to a more acceptable currency (often the US dollar) at a certain rate. Trade is less likely to occur as there will be more risk and they are likely to go elsewhere to conduct their business & FDI

vi. Non covertible currencies are often over valued at their official pegged, exchange rate therefore there might be a black market & this will be damaging. Some domestic currency may become unacceptable within the country & this damages local trade as well international trade

4. Long term changes in TOT a. If commodity prices are falling, export revenues of

primary commodities exporters fall and ability to buy imports decrease.

Trade strategies for economic growth & economic development 1. Import substitution

a. Inward orientated strategy – produce goods domestically rather then import them

b. Industries producing goods domestically will be able to grow as well as the economy and will be able to be competitive on world markets in the future as they gain from economies of scale.

c. The necessary conditions i. The government needs to adopt a policy of

organizing the selection of goods to produce domestically

ii. Subsidies are made available to encourage domestic industries

iii. Implement a protectionist system with tariff barriers to keep out foreign imports.

d. Advantages i. Protects jobs in the domestic market

ii. Protects local culture & social habits by isolating from foreign influence

iii. Protects economy from the power, bad influence of MNC

e. Disadvantages

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i. Protect jobs in the short run – in the long run, economic growth may be slower & lack of growth = lack of job creation

ii. Does not gain from comparative advantage & specialization so producing products relatively inefficiently

iii. Lack of competition – lack of efficiency = lack of R&D

iv. High rates of inflation due to domestic aggreate supply constraints

v. Cause other countries to take retaliatory protectionist measures

2. Export promotion a. Export led growth – outward orientated growth strategy

based on openness & increased international trade achieved by concentrating on increasing exports & export revenues as a leading factor in the AD of the country thus increased GDP, incomes & growth in domestic & exporting markets. Concentrate on producing & exporting products in which it has a comparative advantage of production

b. Policies that are needed: i. Liberalized trade – open up domestic markets to

foreign competition in order to gain access to foreign markets

ii. Liberalized capital flows – reduce restrictions on FDI

iii. Floating exchange rate iv. Investment in the provision of infrastructure to

enable trade to take place v. Deregulation & minimal govt intervention

c. Differences involved in using the export of primary / secondary (manufactured) products as the engine for growth

i. Overall trend for primary produts has been downwards for many years due to increasing supply & relatively insignificant increases in demand for a number of diff reasons + combined with increased protectionism by developed countries = export led growth by exporting primary products is unlikely to be achieved.

ii. Products in which the countries has comparative advantage in is being exported, usually based on low-cost labour & over time the type of product being exported by the majority of countries has also tended to change from products that were being produced using labour intensive methods requiring low skills levels from the workers to more sophisticated products using capital intensive methods and more highly skilled workers. (requires improvements in education systems)

d. Disadvantages

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i. Increased protectionism in developed countries against manufactured products from developing countries. It is argued that developing countries could not compete against the imports from low-wage developing countries and that it is unfair. Lobbied their governments to put tariffs & quotas on the lower priced goods thus increasing prices as a result of tariffs effectively removed the comparative advantage of exporting countries and also reduced the ability of developing countries to export processed goods & assembled products forcing many to export primary products and low skilled manufactured products instead

ii. Infant industry argument iii. If countries attempt to kick start their export led

growth by attracting MNCs, there is always the fear that the MNCs become too powerful

iv. Increase income inequality (economic growth at the expense of economic development)

3. Trade liberalization a. Removal / reduction of trade barriers that block free

trade of G&S between countries (e.g. trade barriers, quotas, export subsidies, administrative legislation)

b. Increase world trade & enable developing countries to concentrate on production of G&S in which they have comparative advantage

c. Policies to encourage market based reforms & economic growth

i. Fiscal discipline ii. Redirect spending from things like indiscriminate

subsidies to basic health & education iii. Lower marginal tax rates & broaden tax base iv. Interest rate liberalization v. Competitive exchange rate

vi. Trade liberalization vii. Liberalization of FDI inflows

viii. Privatization ix. Deregulation x. Secure property rights

4. Bilateral & regional preferential trade agreements a. Countries in a trading bloc give preferential access to

products from other member countries (reducing tariffs) b. More agreements, greater the ability of developing

countries to trade & gain growth and development 5. Diversification

a. Many countries have a problem of being over dependent on exporting a limited range of primary commodities

b. This aim – move from producing & exporting primary commodities to producing & exporting manufactured & semi – manufactured products thus protecting themselves from volatile changes in primary product prices to stabilize / increase export revenues &

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employment. Also, increased use of technology & demand for more highly skilled workers

Development strategies o Fairtrade organizations

Ensure that producers of food & some non-food, products in developing countries receive a fair deal when they are selling their products

Help small farmers & landless workers A trading country wishing to quality for the international

fairtrade certification mark must: Product must reach the trader as directly as possible with

few if any intermediaries Product must be purchased at least at the Fairtrade

minimum price & is a guranteed price that covers production costs & provides a living income.

Producer receives a premium if the product is certified as organic

Trader must be committed to a long term contract Producer must use sustainable farming methods to

produce good Trade also pays a fairtrade premium to producer & they

use these funds to aid local community development (promote health care, education & other social schemes)

Foreign direct investment and economic development Definition for FDI: long term investment by private MNC in countries overseas

o Build new plants / expand their existing facilities in foreign countries (greenfield investments)

o Merge with / acquire (buy) existing firms in foreign countries MNCs are attracted to developing countries because:

o Countries may be rich in natural resources (oils/minerals). MNCs have the tech & expertise to extract such resources

o Some developing countries represent huge & growing markets and if MNCs are located directly in the markets, they have much better access to the large number of potential consumers. Growing incomes = increased demand for all sorts of consumer goods

o Costs of labour = much lower and allow firms to sell final products at lower prices & higher profits

o Government regulations are less severe and makes it easier for companies to set up & greatly reduce costs of production + the government may offer tax concessions to attract FDI

Advantages o FDI helps to fill the savings gap & this may lead to economic growth o Employment (education & training) thus improving skill levels &

managerial capabilities o Greater access to R&D, tech, marketing expertise and could enhance

industrialization o Increased employment & earnings may have a multiplier effect o Tax revenue to invest in infrastructure / improve public services (health

& education) to promote economic development o Injecting foreign capital & increasing AD by buying existing companies o Improve infrastructure (both physical & financial) / act as a spur for the

govt to do so to attract them

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o Provide more choice & lower prices for consumers / providing essential goods that are not available domestically

o More efficient allocation of world resources Disadvantages

o Bring in their own management team, only using inexpensive low skilled workers for basic production & do not provide education / training + limiting ability of host countries to acquire new technologies

o MNC have too much power & they gain large tax advantages / subsidies, reducing govt income and their incomes & size allow them to exert too much influence on policy decisions taken in institutions such as WTO.

o Transfer pricing (sell G&S from one division of the company to another division of the company in a separate country in order to take advantage of diff tax rates on corporate profits). Therefore, developing countries with low tax rates to encourage MNCs to invest reap little tax reward & developed countries also lose out on potential tax revenue. Govts have rules to prevent firms from abusing ability to use transfer pricing to minimize their tax payments but they are difficult to enforce & monitor

o Legislation on pollution is not effective & thus they are able to reduce private costs while creating external costs – this is damaging for the environment. Labour laws are also weak therefore allowing the exploitation of local workers in terms of both low wages & poor working conditions

o MNCs may enter to extract & strip particular resources before leaving – there may be unrest from the host countries as profits from their reasources are being sent out of the country to foreigners.

o MNCs may use capital intensive production methods to make use of abundant natural resources – this will improve employment levels. MNC should use appropriate technology where production methods are aligned to the resources available & since there is a large supply of cheap labour in developing countries, labour intensive production methods would be more appropriate.

o When MNCs buy domestic firms, owners are paid in shares (stocks) from the MNC – actual money may never be used in developing country’s economy

o MNCs may repatriate profits – transferring their profits out of the country back to the MNCs country of origin

Main concerns relate to the positive negative effects of MNCs on sustainable economic development. The extent to which FDI is able to contribute depends on the type of investment & ability of host country govts to appropriately regulate MNCs behavior & use the benefits of the investment to achieve development objectives.

Concerns related to MNCs activity: o Possible exploitation of workers o Use of child labour o Inability of workers to join unions o Business practises that cause immediate / future damage to environment

Aid, debt and economic development Definition of Aid – any assistance that is given to a country that would not have

been provided through normal market forces Aid is provided because:

o Help people who have experienced some form of natural disaster / war o Help developing countries to achieve economic development

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o Create / strengthen political or strategic alliances o Fill savings gap & encourage investment o Improve quality of human resources o Improve levels of technology o Fund specific development projects

Humanitarian aid o Alleviates short term suffering (may be caused by events such as

droughts, war / natural disasters) o Usually comes under the headings Grant aid – short term aid provided

as a gift & does not have to be repaid

Types of grant aids: Food aid – provision of food / money to pay for food (also

includes money for transport, storage & distribution of food) Medical aid – provision of medical services & provisions + money

to faciliate medical services Emergency aid – provision of emergency supplies (e.g. temporary

shelter, tents, clothing, fuel, heating and lighting) Development aid

o Alleviate poverty in the long run & improve welfare of individuals o Also referred to as Official development assistance (ODA)

“flows to developing countries & multilateral corporations provided by official agents, including state & local governments / by executive agencies, each transaction meets the test:

Administered with promotion of economic development & welfare of developing countries as its main objective

Concessional in character & contains grant element of at least 25%

Types of development ai: o Long term aids – usually repayable by the developing country over a

period of 10 – 20 years (also known as concessionary loans / soft loans) which could be repaid in foreign currency / in local currency / mixture. Tend to have low interest rates & repayable over a long period of time then a standard commerical loan

o Tied aid – grants / loans given to developing countries but on the condition that funds are used to buy G&S from donor country

o Project aid – for a specific project in a country & given in the form of grant aid that requires no repayment. Often used to improve infrastructure & one of the main suppliers is the world bank

o Technical assistance aid – tends to have two aims Raise level of technology by bringing in foreign technology &

technicians who can instruct on its use Raise quality of human capital by provision of training facilities &

expert guidance (foreign scholarships are also sometimes provided so that managers & technicians can study abroad)

o Commodity aid – to increase productivity funds for purchasing commodities including consumer items, intermediate inputs & industrial raw materials

Ways of classifying official aid: o Bilaterial aid – from one country to another o Multilateral aid – given by rich countries to international aid agencies

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Concerns about aid o Corruption – government in power may not necessarily have the majority

of the population at heart and therefore it only goes to a small sector o

The balance between markets and intervention

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