4.6: Aid, debt and economic development

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    Definitions

     

    1. Aid/Foreign aid is any assistance that is given to a country that would not have been provided through normal market forces.
    2. Humanitarian aid is given to alleviate short-term suffering which may be caused by events such as droughts, wars and natural disasters. It is a form of grant aid, which is short-term aid provided as a gift and doesn’t have to be repaid.
    3. Development aid is given to alleviate poverty in the long run and improve the welfare of individuals. It is referred to as official development assistance (ODA) and may be provided by an individual country or through multinational organizations.
    4. Soft loan are loans given to developing countries that have a interest rate usually significantly below the market rate.
    5. Tied aid are grants or loans that are given to a developing country, but only on the condition that the funds are used to buy goods and services from the donor country.
    6. Bilateral aid is given directly from one country to another.
    7. Multilateral aid is given by rich countries to international aid agencies, then distributed by the agencies.
    8. Non-governmental organizations (NGOs) exist to promote economic development, humanitarian ideals and sustainable development.
    9. The World Bank is an organization whose aim is to provide aid and advice to developing countries, as well as reducing poverty levels and encouraging and safeguarding international investment.
    10. The International Monetary Fund (IMF) is an organization working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.
    11. Foreign debt/indebtedness relates to the high level of debt that developing countries owe to the developed countries.
    12. Odious debt is incurred by a regime and is then used for purposes that don’t serve the interest of the people.

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    Aid

    • Assistance given to a country that wouldn’t have been provided through normal market forces.

    ●       Reasons for aid provided to developing countries

    • Help people who have experience natural disasters or war.
    • Help developing countries achieve economic development.
    • Create or strengthen political or strategic alliances.
    • Fills the savings gap that exists in developing economies → Encourages investment.
    • Improve the quality of human resources in a developing country.
    • Improve levels of technology
    • Fund specific development projects.

     

    Types of Aid

     

    1. Humanitarian aid

    • Aid given to alleviate short-term suffering.
    • Can be given as a grant aid → No repayments required.

    ●       Types of grant aid

    • Food aid
    • Medical aid
    • Emergency aid

     

    2. Development aid

    • Aid given to alleviate poverty in the long run and improve welfare of individuals.
    • Can be given as a donation and expected to be paid back when the economy is improved.

    ●       Types of development aid

    • Long term loans
    • Tied aid
      • Funds are used to buy goods and services from the donor country.
    • Project aid
      • Given for a specific project and given as a form of grant aid.
    • Technical assistance aid
    • Commodity aid
    • Bilateral aid
      • Aid given by one country to another.

     

     

    • Multilateral aid
      • Aid given by rich countries to international aid groups, which goes to the developing countries.

     

    Role of Non-Government Organizations (NGOs)

    • Main purpose of NGOs is to promote economic development, humanitarian ideals and sustainable development.

    ●       Two activities carried out by NGOs

    • Plan and implement specifically targeted projects for developing countries.
    • Act as lobbyists to influence public policy in areas of poverty reduction, worker’s rights, human rights and the environment.
    • NGOs understand the issues and challenges facing the poor by working with them.
    • NGOs focuses on enhancing human capital, which can be done by literacy programs, AIDS prevention projects, agricultural extension, micro-credit schemes, immunization and vocational training.

     

    Indebtedness

    • Since developing countries borrow money from developed countries for economic growth and development, not being able to repay the money back to the developed countries can cause a huge debt to the economy.
    • Most common type of foreign debt is odious debt, as it is used against the interests of common people in the developing country.
    • Most countries are only able to pay back the original amount of the money borrowed, but they struggle to pay the interest, which increases the debt.
    • Increase in debt → Government’s can’t focus on other areas of the economy till the foreign debt improves → Slows down growth and development.