ISA, Grade 12 Economics Standard and Higher Level, March 2014

SECTION 4: DEVELOPMENT ECONOMICS

4.6 The Roles of Foreign Aid and Multilateral Development
Assistance
Worksheet Foreign Aid and Multilateral development
assistance
Foreword to Development Co-operation Report 2013 (Ending Poverty), issued by the
OEC, written by Angel Gurra,(OECD Secretary-General)
Ending poverty is an international priority that cannot be put on the
back burner. Although we have halved the proportion of people living
in poverty, achieving the first Millennium Development Goal (MDG),
our job is far from complete. Today, 1.2 billion people are still living in
poverty
.. Poverty does not stop at hunger; its effects are far reaching and go
well beyond how much people eat and how much they earn. It is a
multidimensional problem that impacts the well-being of citizens and
the health of economies worldwide. It crosses local and national
borders and, while it is prevalent, no society will function properly.
. The geography of poverty has, and is, shifting with a growing
quantity of people in middle-income countries, including India and
China, living in poverty. The number and diversity of actors in
development is increasing, global interdependencies are growing, and
inequalities are on the rise despite periods of economic growth.
These trends call for broader measures that address poverty and
development not only as a question of income, but also of inequality,
sustainability, inclusiveness and well-being. These measures must be
owned and led by countries, based on their respective development
paths, priorities, capabilities and processes. This means revisiting our
global development goals to ensure they respond to todays needs and
realities..
..There is no single solution. Ending poverty calls for the entire global
community to work together North-South, public and private sectors,
civil society and foundations, and national, regional and local actors
to satisfy multiple and interlocking needs, demands and issues.
Also see:
Economics Course Companion 2nd edition, Jocelyn Blink & Ian Dorton, chapter 32,
Aid, debt and economic development, pages 385 - 389;

Learning objectives classification and types of aid

Define the following terms: official development assistance (ODA), nongovernmental organisations (NGOs), humanitarian aid, food aid, medical aid,
emergency relief aid, development aid, grants, concessional long-term loans, project
aid, programme aid, tied aid, multilateral development assistance;
Classify the different types of aid;
Know that aid which is extended to low-income countries by governments of donor
countries is called official development assistance (ODA);
Know that aid can also be given by non-governmental organisations (NGOs);
Explain that the main priority of NGOs is to provide aid on a small scale to achieve
development objectives;
Explain the different components of humanitarian aid which are food aid, medical aid
and emergency relief aid;
Explain that development aid consists of grants, concessional long-term loans, project
aid and programme aid;
Know that project aid includes support for schools and hospitals;
Know that programme aid includes support for sectors such as the education sector
and the financial sector;
Realise that aid can be both tied and untied aid;
Explain the reasons why higher income countries may give aid;
Compare and contrast (evaluate) the extent, nature and sources of ODA to two low
income countries;
Many different opinions exist about the role and impact of foreign aid. There are
economists who feel that development aid is absolutely vital in encouraging faster and
more equal economic growth and development worldwide. Others feel that aid has
created a dependency on high income countries and caused many low income countries
to find themselves in vicious cycles. For the purpose of your IB DP exam, you should be
aware of these different opinions.
It will be especially important to be aware of the relative advantages of aid and trade.
Increasingly more economists are now supporting the catch phrase aid for trade rather
than aid, not trade or trade, not aid.
Peter Singer is an analyst who has pointed out that high income countries have an
obligation to support low income countries in their efforts to fight absolute poverty.
Jeffrey Sachs is another economist who strongly supports this view. Both support the
UNs commitment to development aid as defined as contributions which equal minimum
0.70% of a countrys GDP. Only a few countries currently meet this target. Paul Collier
has also pointed out the importance of focused aid in his publications.
Other economists strongly oppose development aid. Supporters of this view include
William Easterly and Dead Aid author Dambisa Moyo. To come to a balanced judgement
you need to be aware of the arguments of both (extreme) sides.
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DIFFERENT TYPES OF AID

AID

NGOS
(UNOFFICIAL)

OFFICIAL
DEVELOPMENT
ASSISTANCE
AID

BILATERAL

MULTILATERAL

AID

TIED

UNTIED

HUMANITARIAN
AID (SR)
FOOD AID

MEDICAL AID
EMERGENCY RELIEF
AID

DEVELOPMENT
AID (LR)
GRANTS

PROGRAMME
AID
CONCESSION
AL LONGTERM LOANS

PROJECT AID

ARTICLE 1: Philippine Typhoon Haiyan survivors 'desperate' for aid

1. The official death toll stands at more than 2,000, though some reports say it could be
as high as 10,000. The UN says more than 11 million people may have been affected
and some 673,000 displaced.
2. Typhoon Haiyan - one of the most powerful storms ever recorded on land - hit the
coastal Philippine provinces of Leyte and Samar on Friday. It swept through six
central Philippine islands before going on to kill several people in Vietnam and
southern China.
3. The president warned that storms like Haiyan were becoming more frequent, and
there should be "no debate" that climate change was happening. He said either the
world committed to action on climate change "or let us be prepared to meet disasters".
4. A congressman in Leyte told the BBC that the damage to Tacloban was "so massive
in scale and so extensive in our areas that we literally would have to rebuild from
scratch", he said, calling for greater co-ordination as aid to combat the rising "sense of
hopelessness and desperation".
5. Relief operations are being stepped up, but damage to transport links and continuing
bad weather have hindered aid distribution. The BBC's Jonathan Head in Tacloban
says residents are becoming angry at the lack of progress and increasing breakdown
in security. Planes are arriving at the airport, but bringing little in and only taking
people out, and there is little sign of a co-ordinated relief operation, he says.
6. But Philippine Interior Minister Mar Roxas told the BBC that relief efforts were on
track. "Our first priorities were, number one, to establish law and order; number two,
to bring food and water to the people; and, number three, to recover the cadaver
bags," he said.
7. "[Now] law and order has been stabilised, the supply of food and water is beginning I'm not saying that we're anywhere near it - [but it] is beginning to be stabilised... and
now we are concentrating on recovery of cadavers as well as on the distribution of the
food and the relief that is coming in."
8. On Tuesday the UN launched an appeal for $301m (190m) to help survivors. It has
already released $25m to meet immediate needs. The UN Office for the Co-ordination
of Humanitarian Affairs (OCHA) says 11.3 million people are in need of vital goods
and services, because of factors such as lack of food, healthcare and access to
education and livelihoods. US and British navy vessels are heading to the Philippines
and several nations have pledged millions of dollars in aid.
Source: http://www.bbc.com/news/world-asia-24922492, published 13 November 2013, accessed 10 March 2014

ARTICLE 2: Typhoon Haiyan survivors struggling to rebuild

1. Eighty-two-year-old Aquilina Capampangan sits on the low wall that is all that
remains of the home she and her 84-year-old husband Francisco built for themselves
52 years ago. "Life is so difficult," she says. "If another storm comes, it will be very
difficult for us to survive."
2. Like many others in the small coastal town of Daanbantayan and in the surrounding
region - which lay in the path of "super typhoon" Haiyan as it tore across the central
Philippines - the elderly couple emerged from a more substantial building in which
they sheltered from the storm to find that their home for almost all their married life
was a heap of metal sheets and pieces of wood. At least temporarily, some of these
materials have been salvaged and turned into the small one-roomed shack they are
now living in, alongside the site of their old home.
3. In and around Daanbantayan, many do seem to accept that for all the damage there
has been - to homes, to schools and other public buildings and to fishing boats that are
such a vital source of income - a worse fate was endured by those to the east where
the typhoon made its landfall and whipped up the storm surge that brought a wall of
water inland, particularly in the devastated town of Tacloban. It was in these more
easterly regions that most of the casualties occurred. They now stand, according to
government figures, at just over 6,000 dead and nearly 1,800 still missing.
4. But, as the aid operation moves increasingly from relief to recovery and
reconstruction, it is the broader impact across the typhoon's path that defines the
enormous challenges that lie ahead. Fourteen million people were affected altogether
- some 40% of them, it is calculated, already living below the poverty line. More
people were made homeless by Typhoon Haiyan - known in the Philippines as
Typhoon Yolanda - than by the 2004 Indian Ocean tsunami.
5. Close to six million workers lost their sources of income, 30,000 boats were
destroyed, millions of coconut trees were damaged or flattened and more than 1m
tonnes of crops lost.
6. The aid agency Oxfam is sufficiently worried about the pace of recovery - and that
places like northern Cebu have been overshadowed by the more visibly devastated
Tacloban - that it is now putting 200 of its 500 or so emergency workers into its
operations in this area. Oxfam is not alone in its concern that, for now, many people
are starting to "build back worse", in a country that on average sees 20 typhoons a
year. It believes this is a critical moment in the international response to the disaster
and fears that the funding could begin to drop.
7. Tariq Riebl, Oxfam's Emergency Response Manager, has been in the region since the
disaster. He cautions against being over-optimistic because the Philippines has a
vibrant civil society with people who are very active in helping themselves in ways
not necessarily seen in other countries hit by such disasters.

8. "Maybe," he says, "there should be a new assessment of all the needs as this would
bring to the forefront that there is a massive amount of work to be done and we are
not talking about months here. We are talking about years that this is going to take for
these areas to recover.
9. "I hear too many people talk about six months or 12 months. This is not the scale we
are looking at. We are looking at three to five years or more."
10. At a school I visited, they have put up a temporary classroom to replace one that was
badly damaged but are still waiting to repair damaged parts of the roof. Other schools
had their roofs blown off, too.
11. Efforts are apparently being stepped up to relocate those who were living within 40m
of the shore - on the grounds that they will then be less vulnerable in future typhoons.
But there is a backlash from some local fishermen who say this will discriminate
against them.
12. A local administrator, Felisa Osabel, told me the government needed to resolve the
issue and wanted to make progress. But she acknowledged: "For the poor it is hard."
And she undoubtedly spoke for many in this community when she said that from now
on "with every single storm we will be afraid, always afraid".
Adapted after: http://www.bbc.com/news/world-asia-26088854, published 7 February 2014, written by Mike Wooldridge, accessed
10 March 2014

ARTICLE 3: How do disaster management and aid agencies plan ahead of

disasters? The United Nations and major aid agencies have regional offices around the
world which co-ordinate preparations for a disaster. "We're designed to be on standby in
countries where it's likely to hit," Greg Barrow, a spokesman for the United Nations
World Food Programme (WFP), told the BBC. Immediately after a disaster, the WFP
sends in emergency teams to assess what the food needs are, how supplies can best be
delivered, and how long the need is likely to continue. They also need to determine how
capable the affected country is of responding, and whether its infrastructure is capable of
handling such large quantities of aid and has safe places to store it. In the case of
Typhoon Haiyan, the WFP has used its regional offices in Subang in Malaysia, while its
relief items (high-energy biscuits, shelter, cooking equipment, medical supplies) have
been brought in to the Philippines by chartered aircraft from Dubai.
What are the priorities after a disaster like Haiyan? "In situations like this, the
government should take care of re-establishing lifelines - power, water, communications,
and helping NGOs find where they should be," says Richard Gordon, adding that the first
priority is water. "As the Red Cross, we've been distributing water, water tanks, thousands
of ready-to-eat meals, medicine, shelter, blankets, generators, and inevitably body bags.
We've given out satellite phones so that people can trace the missing. The sick are being
treated on the spot or evacuated to neighbouring provinces." http://www.bbc.com/news/world-asia24927349

ASSIGNMENT 1
The three above articles clearly show the difference between short and long-term foreign
aid. Explain why type of aid would be most needed in the Philippines at this moment.

DIFFERENT TYPES OF AID

Bilateral aid aid from one government to another.
Multilateral aid aid is given to international aid agency deciding where the need is
greatest.
Grants the aid is provided as a gift, with no repayment expected.
Concessional long-term loans: compared to loans from commercial banks or other
participants in financial markets, these loans will have a lower rate of interest rate and
usually a longer pay-back period, sometimes also referred to as soft loans. Not only are
concessional loans provided at far lower than market rates, but also for longer terms, and
with conditions which allow grace periods for payments.
Project aid includes support for schools and hospitals
Programme aid includes support for sectors such as the education sector or the financial
sector.
Soft loans loans that are given at below-market rates of interest.
Official development assistance aid administered by governments or government
agencies.
Unofficial aid administered by a non-governmental body, such as a charity, where the
priority is to provide aid on a small scale to achieve development objectives.
Tied aid the recipient country has to agree to buy goods or services from the donor
country with the provided aid.
Humanitarian aid consists of food aid, medical aid and emergency relief aid.
Debt relief / cancellation
Mixed credits High income countries lend low income countries funds for the purchase
of their exports at below-market prices. In effect, this is a mixture of a loan and an export
subsidy.
Note that aid and trade are not the only two sources of income for countries. Other funds
available to low income countries for growth and development include:
foreign direct investment,
sale of natural resources (for example mining in DR Congo, oil in Nigeria, copper in
Peru) and privatisation of government services (such as water companies),
commercial loans (loans at market interest rates from a bank),
loans from international agencies such as the World Bank and the IMF,
remittances,
export revenues
Lets have a closer look at remittances. Although these are not official development
assistance and provided by one family member to another, these remittances can have a
large impact on the standard of living of those who receive the remittance.

ASSIGNMENT 2:Filipinos boost remittance sector growth in Hong Kong

1. The Central business district of Hong Kong is always busy. But every Sunday, it is the
setting for thousands of the city's Filipino domestic workers gather to enjoy their day off.
The neighbourhood comes alive with the sound of Tagalog, the first language of the
Philippines. But they are not just coming together for social reasons.
2. Perlita Bruno, 47, has been making the familiar trip to World-Wide Plaza - a three-storey
shopping mall in Central - for almost 20 years. At least one Sunday a month, the mother
of two comes to send money to her family in the northern Philippines. She always saves
and remits half her monthly salary of 6,000 Hong Kong dollars ($774; 464) from her job
as a domestic helper. "I work here for my family, for my kids' education, so that they
have a good life," Ms Bruno says, waiting in the queue at PNB Global. "Because we are
very poor in the Philippines," she adds.
3. About 40 other remittance outfits operate in the shopping mall, The biggest difference
between service providers is the exchange rate offered. Currently, one Hong Kong dollar
buys about 5.6 Philippine pesos. The companies that offer stronger Hong Kong dollar
rates will get more customers.
4. PNB Global is a remittance and financial company owned by the Manila-listed Philippine
National Bank. It is one of a number of firms catering to the needs of more than 166,000
Filipino domestic helpers in Hong Kong. There are more than 10 million Filipino
expatriates (10% of the population) - working outside their country.
5. They are commonly called OFWs - overseas Filipino workers - and their remittances are
the biggest source of foreign exchange for the Philippines. The money they send home is
a key driver of domestic consumption, which accounts for the bulk of economic activity
in the sprawling archipelago. Last year, cash remittances hit a record high of $22.8bn, up
6.4% from 2012, and exceeding expectations of a 5% rise, according to the Bangko entral
ng Pilipinas, the country's central bank.
Top remittance-receiving countries (source: PEW Research)
Country
Amount (Billions of US dollars)
India
71.0
China
60.2
Philippines
26.1
Mexico
22.0
France
21.6
6. According to the Pew Research Center, remittances worldwide have nearly tripled since
2000 and fell only for one year after the global financial crisis of 2009. The top three
sources of remittances were the US, Saudi Arabia and the UK, and globally the
Philippines is the third largest recipient of remittances. India is the largest recipient with
$71bn of money received, followed by China according to World Bank data.
Adapted after: http://www.bbc.com/news/business-26318836, published 23 February 2014, accessed 10 March 2014, written by Juliana Liu

Question:
8

How can (cash) remittance help a country to grow and develop?

Abbreviated abstract from the Executive Summary of the same OECD Development
Report Ending Poverty (2013):
The world has probably already met the MDG target of halving the
share of the population living in extreme poverty (USD 1.25 per day).
Yet progress towards the MDGs across countries, localities, population
groups and gender has been uneven, reflecting a fundamental
weakness in current approaches. As the United Nations and its
partners
shape a new global framework to take the place of the MDGs in 2015,
they face the urgent challenge of ending poverty once and for all. As
this Development Co-operation
Report (DCR) makes clear, this will take more than business as usual.
What is poverty and how is it measured?
Poverty is not only about income. The MDG goal to halve extreme
income poverty sidesteps many other deprivations. Economic growth
is not sufficient to eradicate all dimensions of poverty or to benefit all
people.
Poor people do not only live in poor countries. Today, a new bottom
billion live in middle-income countries, including India and China.
National poverty measurements fail to capture these within-country
inequalities or to guide progress in eradicating them
Poverty is not standard or static. New measures should look beyond
global aggregates to reflect countries different starting points and
challenges, address inequalities, and ensure comparability over time.
At least half a billion people are entrenched in chronic poverty.
Policies must be specially formulated not only to end extreme and
chronic poverty, but to prevent new
impoverishment.
Achieving the end of poverty will require new policies, commitment
and leadership by national governments North and South and the
entire global community. Governments, parliamentarians, multilateral
and regional institutions, civil society, non-governmental organisations
(NGOs), foundations, and the private sector will need to co-operate to
ensure that all polices in all areas work together to end poverty:
See development as a shift from poverty to power by empowering
individuals, especially women and the chronically poor and eliminating
social discrimination that keeps them poor. Development co-operation
agencies, political movements and civil society organisations can
support such power shifts
Build inclusive and sustainable economies that enable the poorest to
participate in and benefit from growth. This will require a re-orientation
and reprioritisation of policies and programmes especially in
agriculture, education, energy and employment
9

 Provide systems of social protection employment guarantees, cash

transfers, pensions, child and disability allowances to create a
virtuous cycle that enables poor people to sustain their livelihoods,
build assets, access economic opportunities and withstand shocks such
as climate change.
Make environmental sustainability and natural resources a core
priority, inextricably
linked to poverty reduction and well-being.
Support the exchange of knowledge and experience on poverty
reduction, particularly
among Southern countries
What does this mean for development co-operation?
Extra support will be needed to meet these challenges. While
financial resources increasingly will come from countries own tax
systems, official development assistance (ODA) will still be critical.
It must become smart at attracting additional funds within a
single, unified global structure that optimises all available sources
of finance and ensures accountability
The new Global Partnership for Effective Development Co-operation
could catalyse and co-ordinate global efforts and resources.
Eliminating poverty and reducing inequality, within and among
countries, will require sustained and coherent support to fragile
states; targeting of pockets of extreme poverty in middle-income
countries;
developing states own capacity for delivering public goods; and
recognising that peace and the reduction of violence are the
foundations of poverty eradication.

10

DA
TA RESPONSE 1

11

12

Questions:
a) Using the article, give an example of the following terms and define the term:
i.
Food aid
ii.
Emergency (relief) aid
iii.
Bilateral aid.
iv. Official Development Assistance (ODA)
v. Programme aid
b) Explain the barriers which limit the effectiveness of foreign aid in Haiti.
c) Explain the motivations of Spain to give aid to Haiti.
d) With reference to Figure 1, explain why there is a difference between the Human
Development Index (HDI) figures for Haiti and Madagascar.
e) Using information from the text / data and your knowledge of economics, evaluate aid as
a means of achieving economic development in Haiti.

13

ASSIGNMENT 3 (from the Development Cooperation Report 2013)

1.
2.

Explain what the number 718.0 on the table represents

Explain what is expected to happen to extreme poverty in the next 2 decades.

ASSIGNMENT 4 (from the Development Cooperation Report 2013)

1.
2.
3.
4.

Questions:
Which type of country receives the largest share of ODA?
Give a reason why upper-middle income countries (UMICs) would need to receive
ODA.
The share of ODA given to low and lower-middle income countries seems to have falling
since the late 1980s. Does this mean that these countries receive less ODA than before?
What is meant by unallocated ODA?

14

ASSIGNMENT 5

1. Explain to what extent this cartoon is still relevant in the world today.
ASSIGNMENT 6
1. When it comes to overseas aid, the
British are hard-headed but not hardhearted, David Cameron declared on
July 19th 2011 in Nigeria. The line
was in part a snappy soundbite. But it
was also a plea, as voters rebel against
the ideapopularised under the
previous, Labour government but
embraced by Mr Cameronthat
Britain should become an aid
superpower.

2. In Lagos, Mr Cameron painted a vision of British aid as a catalyst for economic growth.
To reassure aid sceptics back home, who worry about money going astray, Britain will
focus its cash on things that are quantifiable and measurable, such as campaigns to
vaccinate millions of children, he vowed. The prime minister talked of unclogging
regional and international trade with investments in new internet links, roads and more
professional customs services. Yes, Britain should help the starving and those ravaged by
war, drought and disease, he said; but growth, nurtured by free trade and political
reforms, had the potential to wean Africa off aid altogether.

15

Question:
Explain Britains position of foreign aid.
ASSIGNMENT 7

1. Give reasons why ODA for economic and production sectors could have fallen.
ASSIGNMENT 6
a) Define untied aid.
b) Study the figure on the next page and explain the reasons for the trend in untying aid
in the 1995 -2010 period.

16

UNTIED AID
Evidence has shown that the tying of aid - offering aid on the condition that it be used
to procure goods or services from a specific country or region - can increase the costs of a
development project by as much as 15-30%. In addition, the administration of tied aid
requires larger bureaucracies in both the donor and recipient countries.
Untied aid avoids these unnecessary costs by giving recipient countries the freedom to
use their aid to procure goods and services from virtually any country. From 1999-2001
to 2008, the proportion of untied bilateral aid rose progressively from 46% to 82%.
Source: http://www.oecd.org/dac/untied-aid/untyingaidisitworking.htm (accesed 04 March 2013)

SOME FACTS YOU NEED TO KNOW ABOUT ODA

The Development Assistance Committee (DAC) consist out of Australia, Austria,

Belgium, Greece, Iceland, Ireland, Italy, Poland, Portugal, Slovak Republic, Slovenia,
Canada, Czech Republic, Denmark, EU, Finland, France, Japan, Korea, Luxembourg,
The Netherlands, New Zealand, Spain, Sweden, Switzerland, UK, USA, Germany,
Norway.

The DAC defines ODA as those flows to countries and territories on the DAC List (see
further in this hand-out) of ODA Recipients and to multilateral institutions which are:
o provided by official agencies, including state and local governments, or by their
executive agencies; and
o each transaction:
i.
is administered with the promotion of the economic development and welfare
of developing countries as its main objective; and
ii.
is concessional in character and conveys a grant element of at least 25 per cent
(calculated at a rate of discount of 10 per cent).

In 2012, DAC members provided USD 125.9 billion in net ODA, representing 0.29% of
their combined gross national income (GNI). This was a a drop of 3.9% in real terms
compared to 2011. The financial crisis and euro zone turmoil led many governments to
implement austerity measures and reduce their ODA budgets.

In 2012, the largest donors by volume were USA, UK, Germany, France and Japan.
Denmark, Luxembourg, the Netherlands, Norway and Sweden are the only five countries
which exceed the UN ODA target of 0.7% of GNI. Among DAC members, G7 countries
provided 70% if total net DAC ODA in 2012, a decrease from 75% in 2005. The DAC
EU countries share (51%) is the lowest it has been since 2001.

There is a shift noticeable in aid away from the poorest countries towards middle-income
countries

17

Country programmable aid (CPA) is a subset of total ODA. It is also known as core aid
and represents the portion of aid donors programme for individual countries, and over
which partner countries could have a significant say. CPA is defined through exclusions
by subtracting from total gross bilateral ODA the following activities: that are inherently
unpredictable (e.g. humanitarian aid and debt relief), entail no cross-border flows and do
not form part of co-operation agreements between governments (e.g. food aid, core
funding to NGOs)

Untied aid is defined by DAC as loans and grants whose proceeds are fully and freely
available to procurement (the purchase of goods and services by the government) from all
OECD and partner countries. If this is not the case, then aid is tied (buy only from
suppliers in the donor countries) or partially untied aid (procurement open to a restricted
number of countries). The idea is that untied aid promotes cost-effective use of aid and
promotes free and open trade. Multilateral aid is untied.

DAC members are asked to screen their aid against the gender inequality marker.

18

Lets focus on one particular donor country: The Netherlands

19

20

21

MILLENNIUM DEVELOPMENT GOALS

You should be aware of the current status of international development goals. The most
important and influential are the Millennium Development Goals which will expire by
2015. The UN organisation has therefore started a very ambitious programme to develop
new indicators of development and to set new goals. A data response question could
report on the status of these MDGs. Please make sure that you know the goals by heart
and if you want to read more about them, go to http://www.un.org/millenniumgoals/

22

Aid can be given to different sectors and projects. After the Millennium Development
Goals (MDG) were formulated, changes in the areas where aid was distributed has been
clear.

Since 2002, Official Development Assistance (ODA) for health per capita/year in the
WHO African Region has increased from US$ 2.7 to US$ 9.8 in 2010. Most of the
increase has been however targeting MDG6, with all other health development priorities
together receiving in 2010 less than 50% of the resources disbursed for MDG6. 768% is
the increase of Official Development Assistance (ODA) disbursements for health from
2000 to 2010 and 58%of all ODA commitments for health were to combat HIV/AIDS,
malaria and other diseases in 2009-2010

23

On immunization, from the UNICEF website:

Immunization is one of the most successful and cost-effective public health interventions.
According to the latest data, in 2012, global efforts to immunize children with vaccines
against life-threatening diseases reached 111 million children and averting an estimated 2
to 3 million deaths per year along with countless episodes of illness and disability.
However, despite significant gains in recent years, in 2012, some 22.6 million children of
children under one year of age (almost 20% of children born each year) are not
immunized, exposing them to disabilities or premature death. Among immunized
children, more than 70% live in the 10 countries with the largest populations and the
weakest immunization structures in the world.
Immunization has the potential to boost a country's growth. Immunization makes
economic sense. Many analyses weighing the costs versus the benefits of vaccination
have shown positive economic impact. What's more, the infrastructure, management and
acceptability of immunization programmes offer a platform to deliver other health and
nutrition interventions.
UNICEF and its partner organizations are responding to the challenge with a global push
to ensure that the hardest children to reach most of them in Africa and Asia are
immunized. Major initiatives are underway to accelerate the development and
deployment of new and underused vaccines, for example hepatitis B (Hep B) and
Haemophilus influenzae type b (Hib) vaccine. The number of countries using Hep B
vaccine for infants has increased from 31 countries in 1992 to 181 in 2012 and for
the Hib vaccine, has increased from 177 in 2011 to 184 in 2012
Significant progress has been made to reduce mortality and morbidity due to vaccine
preventable diseases such as polio, measles and maternal and neonatal tetanus through
supplementary immunization activities or campaigns, in addition to routine vaccination
programmes. These campaigns provide valuable opportunities to reach children in older
age groups compared to routine vaccination and to introduce other high-impact lifesaving interventions such as vitamin A tablets, insecticide treated bed nets and deworming tablets.
Achievements aside, there are daunting challenges in vaccinating all target children, not
least of which is rising cost. Providing traditional and new vaccines can now cost as
much as $20 to $40 per child. Other obstacles to higher coverage include non-availability
of sustainable resources, poor management and logistics systems, inequity in services,
and a lack of community engagement.
UNICEF works with governments, partners and communities to increase demand for
immunization establish better cold chain and logistic systems. In addition, UNICEF,
which currently supplies vaccines reaching 36% of the world's children, works with
partners and manufacturers to obtain vaccines at affordable prices while maintaining a
healthy market.

24

ASSIGNMENT 7: PROGRAMME AID

Aid lifts Kenyan maize farmers fortunes
1. Tearing off long green leaves from a towering maize plant, Emily Nabwile Misiko
offers them to her cow. Sitting under a tree beside her mud and dung hut in western
Kenya, the animal is her prize possession and proof that a new scheme to help the
worlds poorest farmers is working.
2. Just last year, Ms Misiko grew the equivalent of five 90kg sacks of maize, the
countrys staple, from her small half-acre plot. That was just about enough to feed her
family of six for a year, but not enough to sell any surplus.
3. This year that has changed, thanks to a loan from charity One Acre Fund, whose work
the Financial Times is highlighting as part of its inaugural Summer Charity Spotlight.
4. Ms Misiko made the most of new seeds, fertiliser and training to bring radical change
to her farm: she more than doubled her crop to 12 bags and invested the proceeds
from the sale of seven sacks into buying the cow.
5. Before I used to scatter maize seeds and that was that, says the 24-year old, sitting
in the low light of her hut, as a chicken pecks its way around. Ms Misiko now plants
seeds in carefully dug holes in rows, topped with fertiliser in individual mounds. The
results have been so successful she hopes to take out new loans and rent an additional
half acre to make the most of her flourishing harvests.
6. One Acre Fund, which also works in Rwanda and Burundi, says the inputs provided
from a small annual $75 loan enough for a three-quarter acre plot will double
output at a time when global supply is falling and prices rising. Its speedy take-up is
impressive: from an initial 40 families in 2006, the group assists 130,000 farmers and
wants to reach 1.5m by 2020.
7. The charitys founder Andrew Youn, a 33-year-old former management consultant
and Yale graduate believes that: seed, fertiliser and training kickstart this economic
engine for people to earn their way out of poverty.
8. The charity recoups about 85 per cent of its $14.1m field operation costs from farmers
repaying $12.1m in loans, on which they pay about 17 per cent interest. It wants to
make $20m in loans next year as it scales up.
9. To fund its ambitions, One Acre Fund is seeking loans from commercial banks,
alongside soft loans and grants from development finance institutions and public
support. Mr Youn says the money goes a long way: each loan can be lent twice in a
year, thanks to two annual harvests, and provides collateral to raise money for a third
loan, too.

25

10. Not only does the group provide seeds, fertiliser and pesticide but each $75 package
also provides sacks for storage, insurance, and, perhaps most important of all,
training.
11. The poverty trap is not averted just yet, however. Rampant speculation means maize
prices fluctuate wildly: low during harvest times and close to three times as high
during the interim. Few smallholder farmers can afford to wait.
12. If I didnt have to pay school fees I could withhold my maize, but I have to sell it
when prices are low to pay the fees, says Mrs Simiyu.
13. Even so, the One Acre Fund approach is so successful some have even abandoned
sugar cane, the regions lacklustre cash crop.
14. Sugar cane takes a longer time to mature and it doesnt help our suffering with
hunger, says Esther Muricho, a 57-year-old mother of ten children. Now I plant
maize.
Adapted after: The Financial Times, http://www.ft.com/intl/cms/s/0/662506c6-e642-11e1-bece-00144feab49a.html?
ftcamp=published_links%2Frss%2Fworld%2Ffeed%2F
%2Fproduct&ftcamp=crm/email/2012816/nbe/WorldNews/product#axzz23iZBYl7a, 15 August 2012, written by Katrina Manson.

Question:
Explain the importance of strengthening the agricultural sector in Kenya.
ODA: TOTAL vs. % of GNI
Official Development Assistance (ODA) does not include private contributions or private
capital flows and investments such as FDI or donations by private charities. The main
objective of ODA is to promote growth and development. Pekka Hirvonen from the
Global Policy Forum and author of Stingy Samaritans; Why Recent Increases in
Development Aid Fail to Help the Poor states that recent increases [in foreign aid] do
not tell the whole truth about rich countries generosity, or the lack of it. He feels that
development assistance is often of dubious quality. He gives several reasons for this.
In many cases, aid is primarily designed to serve the strategic and economic interests of
the donor countries or to benefit powerful domestic interest groups. It may be that aid
systems are based on the interests of donors instead of the needs of recipients so that too
little aid reaches countries that most desperately need it or is wasted on overpriced goods
and services from donor countries.

26

What is the 0.7% target?

0.7 refers to the repeated commitment of the world's governments to commit 0.7% of
high income-countries' gross national product (GNP) to Official Development Assistance.
First pledged 35 years ago in a 1970 General Assembly Resolution, the 0.7 target has
been affirmed in many international agreements over the years.
The UN Millennium Project's analysis indicates that 0.7% of rich world GNI can provide
enough resources to meet Millennium Development Goals, but developed countries must
follow through on commitments and begin increasing ODA volumes today. If every
developed country set and followed through on a timetable to reach 0.7% by 2015, the
world could make dramatic progress in the fight against poverty and start on a path to
achieve the Millennium Development Goals and end extreme poverty within a
generation. The core inputs to developmentteachers, health centers, roads, wells,
medicines, to name a feware eminently affordable if rich and poor countries alike
follow through on their commitments.
Source: accessed 04 march 2010 adapted after http://www.unmillenniumproject.org/press/07.htm#02

27

ASSIGNMENT 8
It could be that you get a data response question in which you will be asked to compare
and contrast the extent, nature and sources of ODA to two economically less developed
countries. Although it is impossible to predict whether this will be the type of data
response question you will get and which two countries could be compared and
contrasted, we could try to simulate this type of question. Compare and contrast Haiti and
Pakistan using your own knowledge and the information which follows.

28

29

The DAC1 List of ODA Recipients shows the countries and territories eligible to receive official development assistance (ODA). The
DAC is the Development Assistance Committee of the OECD. The list consists of all low- and middle-income countries based on
gross national income (GNI) per capita as published by the World Bank, with the exception of G8 members, European Union (EU)
members and countries with a firm accession date for entry into the EU. The list also includes all of the Least Developed Countries
(LDCs) as defined by the United Nations (UN).

30

ISA, Grade 12 Economics Standard and Higher Level, March 2014

SECTION 4: DEVELOPMENT ECONOMICS

4.6 The Roles of Foreign Aid and Multilateral Development
Assistance
Worksheet Foreign Aid and Multilateral development
assistance

Learning objectives evaluation of foreign aid

Evaluate the effectiveness of foreign aid in contributing to economic development;
Compare and contrast the roles of aid and trade in economic development;
Also see:
Economics Course Companion 2nd edition, Jocelyn Blink & Ian Dorton, chapter 32, Aid,
debt and economic development, pages 390 - 393;
You could be asked to evaluate foreign aid. To do this, you could be asked to compare
and contrast the roles of aid and trade in economic development. See the points below:

Advantages of Trade (also see your notes from International Economics (section 3))
Some outward-oriented countries have experience high rates of economic growth as a
result of their rapidly-expanding exports.
Trade enables countries to specialise in production in which the country has a
comparative or absolute advantage which makes the use of resources more efficient.
The Asian Tigers and Newly Industrialised countries (although not so new anymore) are
real world examples of this strategy. In 1993, the World Bank published a report, entitled
the ``East Asian Miracle,'' which identified eight countries that had achieved ``seemingly
miraculous'' rates of sustained growth over the 25-year period from 1965 to 1990. The
eight were Japan, the ``Four Tigers:'' Hongkong, South Korea, Singapore, and Taiwan;
followed by the ``newly industrializing economies,'' now called ``emerging Tigers:''
Indonesia, Malaysia, and Thailand.
Specialisation and producing for foreign markets can create economies of scale.
Trade can provide countries new export opportunities which could ceteris paribus
increase a countrys net exports, increase output and create additional jobs.
Exports can lead to an inflow of foreign currency.
Disadvantages of Trade
World trade is dominated by high income countries and MNCs (multinational
corporations). It is difficult for low income countries to enter the world market and
compete against established exporting countries and MNCs. Trade blocs and tariffs create
additional barriers for low-income countries in accessing international markets.
Many low income countries depend heavily on the export of one or two often primary
commodities and the importing of manufactured goods; deteriorating terms of trade have
harmed both economic growth and development.

31

When low income countries do attempt to industrialise/diversity, they often come up

against trade barriers in high income countries. Recent trade talks by the WTO (Doha
Development Round) clearly showed that regions like the EU and North America are not
very keen to liberalise trade restrictions to favour new export countries.
More trade liberalisation may not create sustainable development. High rates of
economic growth as a result of rapidly-expanding exports, may not necessarily contribute
to increased development. Income inequality may (initially) increase, production could
cause large negative externalities and high levels of inflation may particularly hurt the
purchasing power of the lower-income households.
When low income countries specialise in the production of goods where they do have an
absolute or comparative advantage, it may push them to produce low value-added goods.
This limits the revenues from exports. Also low income elasticity of demand, and low
price elasticity of both demand and supply may cause that the export revenues from
goods are very unpredictable making it more difficult to generate a constant level of
economic growth.
The investment in infrastructure and capital stock needed to be able to successfully
compete may (further) increase a countrys international debt or lead to opportunity costs
in spending on other areas.
Arguments in favour of aid
Note that you are to demonstrate knowledge of economic arguments for aid (political,
moral and humanitarian arguments will not be rewarded heavily, but might contribute to a
well rounded answer). The effectiveness of aid in creating growth and development
depends heavily on the type of aid and development strategy but possible points which
could be made are:

lack of financial capital and expertise is a barrier to development which aid can fill.
the donor as well as receiver benefiting from higher income in the recipient country
aid could be used to bridge the savings gap and investment gap
fill the technology gap
can provide needed foreign exchange currency.
empirical evidence supports that NGO aid is successful in contributing towards
development.
aid (and especially aid for trade) could be used as a transition strategy
aid given to finance:
provision of merit goods in recipient country
to finance imports of appropriate technology
to finance infrastructure projects in low-income countries (however, supporting noncommercially viable projects may give benefits such as reducing unemployment
whilst the project is being constructed. However when the development assistance is
withdrawn the project may fail to stand on its own and either collapse or require
additional funding).
Do you want to see advocates and adversaries of aid in action, then go to:

https://www.youtube.com/watch?v=INVMnknVHLU&list=PLB325301664E84EE0&index=3

32

https://www.youtube.com/watch?v=eMGM-_Ifli0&list=PLB325301664E84EE0&index=2
https://www.youtube.com/watch?v=av1FFB9M5uU&index=6&list=PL3E8055D35B1F4A5F
https://www.youtube.com/watch?v=HIPvlQOCfAQ&list=PL3E8055D35B1F4A5F
https://www.youtube.com/watch?v=yhiRYn6df9Q&list=PL3E8055D35B1F4A5F

Arguments against aid

Aid has failed because of the poor economic policies adopted by recipient countries,
e.g. capital flight, corruption, government planners choosing more prestigious but less
essential projects, finance of military expenditure and other misuse of aid
Benefits of the aid might not go to the poor, but the middle income households.
Inappropriate aid due to the demands of donor countries
Foreign / Official Development Assistance may provide funding for production that
the private sector might have invested in for commercial reasons and therefore pushes out
private enterprise and initiatives.
Could displace local producers, for example food aid is damaging to domestic
farmers as they cant compete with subsidised foreign prices.
Interventions like aid tend to interfere with market forces, for example the transfer of
low interest loans to fill the savings or foreign exchange gap will interfere in the market
determination of interest rates and exchange rates.
encourages reliance on handouts (dependency culture). This could ensure future
dominance of donor countries.
Foreign aid tends to focus on the modern commercial sector while the highest level of
poverty can be found in rural, agricultural regions.
Aid may build up resentment in the donor and recipient country.
Aid can add to a countrys debt and therefore cause debt service problems.
Bias towards urban areas increasing income inequalities and worsening rural-urban
migration.
Certain conditions attached to aid may include the implementation of free
market/supply side policies e.g. privatisation which may lead to de-development.
Empirical evidence seems to suggest that aid is often less effective than trade related
development, e.g. through fair trade schemes
Development has not always been the target of aid. In this case, it might be relevant
to discuss the benefits to donors of giving aid. These might include:
o
aid given to finance imports from donor countries
o
aid given to pay for debt/aid which increases indebtedness to the donor
o
aid given to support political regimes sympathetic to donor countries
o
aid given to provide employment in the industries of the donor country or
to sell products from the donor country, e.g. construction contracts or military
defence products
Did You Know?
o
About one billion people, one-sixth of the world's population, live on less
than $1 per day.

33

o
o

o
o
o
o
o

The U.S. currently spends $450 billion on its military, but only about $16
billion in official development assistance.
In Sub-Saharan Africa, more than 15 of every 100 children die before the
age of five. In western Kenya, fertilizer costs more than twice what it costs in France
or the U.S. Ethiopia is so deforested that rural households cannot use manure as
fertilizer because they need it as cooking fuel.
The rich countries have repeatedly promised to give $210 billion (0.7% of
their incomes) in official development assistance, but only give $69 billion.
Because of HIV/AIDS, life expectancy in crisis countries like Botswana
has dropped to below 40 years.
Millions of people, mostly children, die from malaria every year. For
about $3 billion from the rich world, 2 million malaria deaths could be averted.
$25 billion a year would be enough to deliver life-saving health services to
the low-income countries. The U.S. has recently given $200 billion per year in tax
cuts.
Preliminary estimates show that the Millennium Development Goals can
be met if foreign aid were increased by $75 billion per year, well within the promise
of 0.7%.

Source: http://www.earth.columbia.edu/articles/view/1780 (accessed 8 April 2014)

34

DATA RESPONSE 1 (M11/3/ECONO/HP3)

Study the extract below and answer the questions that follow.
Is Africa too dependent on aid?
1. According to Zambian economist Dambisa Moyo, aid programmes have failed to
improve the lives of most Africans and have created a damaging mutual dependence
between donors and often corrupt governments. Moyo says that aid has done more
harm than good in Africa.
2. For example in Zambia, the government has given up its responsibility for health
care, turning much of its administration over to foreign donors.
African countries too often suffer from a cycle of corruption, disease,
poverty and aid-dependence. Educated young people have few
opportunities. Moyo opposes assistance which is not targeted for
particular uses, but supports emergency financial relief from the
International Monetary Fund (IMF).
3. A former World Bank President defended aid programmes, praising the 12 to
15 African countries that are doing well, with several years of
economic growth exceeding 6 %.
4. The president of The Centre for Development and Population Activities (CEDPA),
says that the evidence just doesnt support Moyos view. Malawi,
while still among the poorest countries in the world, has seen real
progress because of strong cooperation between donor agencies,
the government of Malawi, international organizations and local
community groups.
5. Over the past decade, investment in improving the lives of women and children in
Malawi has paid off enormously. Child deaths have been reduced by
nearly half (from 221 per thousand in 1990 to 120 per thousand in
2007); more children are going to school than ever before, and the
number who complete primary school has doubled. Also, the
number of women who are now using family planning services has
more than tripled.
6. These real results should not be ignored when we look at aid effectiveness. The
CEDPA president argues that Moyo is really looking at only one
particular kind of aid: the transfer of financial resources to
governments. Good aid involves more than money; it responds to
locally-driven needs, includes technical assistance and institution
building to strengthen efficient and honest public administration.
[Source: adapted from http://www.huffingtonpost.com/carol-peasley/is-aid-really-dead_b_189613.html, 21
April 2009 and Zambian
Economist says Africa too dependent on aid, http://www.voanews.com, 21 April 2009]

35

(This question continues on the following page)

36

Questions:
(a)

Define the following terms indicated in bold in the text:

(i) economic growth (paragraph 3)
[2 marks]
(ii) investment (paragraph 5).

(b)

[2 marks]
Explain how foreign aid can help a country such as Malawi to
break out of a poverty cycle.
[4 marks]

(c)

Using a production possibility curve (PPC) diagram, explain why

economic growth may not necessarily lead to economic
development.
[4 marks]

(d)

Using information from the text/data and your knowledge of

economics, evaluate the effectiveness of different forms of aid in
promoting economic development.
[8 marks]

37

Trade for Aid Initiative

The WTO Task Force concluded that aid for trade comprises the following categories:
(a) technical assistance for trade policy and regulations (e.g. helping countries to develop
trade strategies, negotiate trade agreements, and implement their outcomes);
(b) trade-related infrastructure (e.g. building roads, ports, and telecommunications
networks to connect domestic markets to the global economy);
(c) productive capacity building, including trade development (e.g. supporting the private
sector to exploit their comparative advantages and diversify their exports);
(d) trade-related adjustment (e.g. helping developing countries with the costs associated
with trade liberalisation, such as tariff reductions, preference erosion, or declining terms
of trade);
(e) other trade-related needs, if identified as trade-related development priorities in
partner countries' national development strategies.
Source: http://www.oecd.org/document/21/0,3746,en_2649_34665_43230357_1_1_1_1,00.html

Trade can be a powerful engine for economic growth and poverty reduction, but
according to the OECD many developing countries may find it difficult to take advantage
of all the benefits. This is particularly true for the least developed countries where there is
often a lack of capacity in terms of information, policies, procedures, institutions,
and/or infrastructure to integrate and compete effectively in global markets.
To address these barriers, the WTO has led the call for more and better aid for trade. In
fact, aid for trade increased 62% in real terms between the 2002- 05 baseline period and
2008, with commitments in 2008 totalling USD 41.7 billion. Aid for trade can provide a
short-term stimulus with long-term impacts on improving the ability of enterprises in
low-income countries to respond to trade opportunities. Aid for trade bolsters the
contribution of trade to economic growth and poverty reduction.
There is a large and growing body of evidence that there are positive links between
openness to trade and economic performance. Steady reduction in trade barriers
particularly in manufactured goods has enabled these countries to rapidly integrate into
world markets through an export-led industrialisation process.
Opening up trade regimes and enhancing market access is often not sufficient, however,
to enable developing countries to participate and reap all the potential benefits of trade
liberalisation. These countries need help in building their trade-related capacity if they are
to benefit. There is no doubt that this may sometimes require painful structural
adjustment.
Strengthening the linkages between trade and human development is very much part of
the broader development agenda. In particular, this is an integral part of the global
partnership for development mapped out by the Millennium Development Goals (goal
number 8). Aid for trade underpins these objectives by strengthening the positive links
between trade, economic growth and poverty reduction.
Source: http://www.oecd.org/dataoecd/30/36/45581702.pdf

38

DATA RESPONSE 2: TRADE NOT AID

1. The benefits of government aid or Official Development Assistance (ODA) have
been questioned by successive Australian governments. The UN target for ODA is
0.7 % of GNP and Australia has budgeted US dollars ($) 1 billion in 2002-03
which represent 0.25 % of Australias GNP. In October 2002 the Minister for
Foreign Affairs, Alexander Downer, argued that trade was the main factor and that
aid can only help to a small extent.
2. The trade not aid policy is strangely out of touch with what the poorest
countries need for both economic development and trade expansion. Most simply
do not have the necessary resources. The United Nations Commission on Trade
and Development says that in the 49 poorest Least Developed Countries (LDCs),
between 1995 and 1999, the average per capita income was US ($) 0.72 and the
average per capita consumption, was US ($) 0.57 a day This would leave an
average US ($) 0.15 per person per day to spend on private capital formation,
public investment in infrastructure and the running of vital public services,
including health, education, administration and law and order.
3. It is often claimed that trade brings much larger benefits to the poor than aid does.
The problem with this claim is that the economic models used for trade policy
analysis assume that poorer countries already have well-functioning markets for
goods and services, a sound banking system, well-defined property rights, a
skilled and healthy workforce, well-functioning legal and tax system and good
infrastructure. But for many of the poorest countries these institutions are either
not effective or non-existent, the human capital base is poor and the infrastructure
is sadly deficient. Aid has a critical role in strengthening all these vital capacities.
4. Aid is essential to improve levels of education, sanitation and health to help the
poorest countries escape from the poverty cycle and to build the skilled
workforces needed to enable them to prosper. Without adequate investment in
education, especially for women, countries risk becoming caught in a trap of low
skills and low-quality products. Aid does work and it makes a huge difference to
the lives of poor people. But aside from its obvious humanitarian benefits, aid
should be considered an investment in our future, not a cost.
[Source: adapted from Action News, a World Vision publication, Autumn 2003]

(a)
(b)
(c)
(d)

Define the following terms indicated in bold in the text:

(i)
infrastructure (paragraph 2)
[2 marks]
(ii)
poverty cycle (paragraph 4).
[2 marks]
Using an appropriate diagram(s), explain the difference between economic growth and
development.
[4 marks]
Explain two reasons why increased investment in education is essential for development in
developing economies.
[4 marks]
Using information from the text and your knowledge of economics, evaluate the view that
increased trade is more important than increased aid for less developed economies.

39

[8
marks]

40

ISA, Grade 12 Economics Standard and Higher Level, March 2014

SECTION 4: DEVELOPMENT ECONOMICS

4.6 The Roles of Foreign Aid and Multilateral Development
Assistance
Worksheet Foreign Aid and Multilateral development
assistance
Learning objectives multilateral development assistance
Know that the International Monetary Fund (IMF) and the World Bank (WB) provide
multilateral development assistance;
Examine the current roles of the IMF and WB in promoting economic development.
Also see:
Economics Course Companion 2nd edition, Jocelyn Blink & Ian Dorton, chapter 32,
Aid, debt and economic development, pages 394 - 398;
DATA RESPONSE 2

IMFs four steps to damnation

1. Robert Stiglitz, ex-chief economist of the World Bank, believes there are four steps
which characterise structural assistance programmes:
2. Step One is privatization. Stiglitz points out that rather than objecting, some politicians
happily sold their electricity and water companies. .You could see their eyes widen at the
possibility of commissions for shaving a few billion off the sale price. US-backed power
lites stripped Russias industrial assets, with the effect that national output was cut
nearly in half.
3. Step Two is capital market liberalisation. In theory this allows investment capital to flow
in and out. Unfortunately, as in Indonesia and Brazil, the money often simply flows out.
And when that happens, to seduce speculators into returning a nations own capital funds,
the IMF demands these nations substantially raise their interest rates. The result was
predictable, said Stiglitz. Higher interest rates demolish property values, savage industrial
production and drain national treasuries.
4. Step Three is market-based pricing. Essentially raising prices on food, water and
cooking gas. This leads to Step-Three-and a- Half: what Stiglitz calls the IMF riot. The
IMF riot is painfully predictable, as when the IMF eliminated food and fuel subsidies for
the poor in Indonesia in 1998, Indonesia exploded into riots. The IMF riots cause new
flights of capital and government bankruptcies. This economic arson has its bright side
for foreigners, who can then pick off remaining assets at rock bottom prices.
5. A pattern emerges. There are lots of losers but the clear winners seem to be the western
banks and US Treasury. Now we arrive at Step Four: free trade. Europeans and
Americans today are kicking down barriers to sales in Asia, Latin America and Africa
while barricading their own markets against the Third World s agriculture.
6. Stiglitz has two concerns about IMF and World Bank strategy. Firstly, it undermines
democracy as the plans are devised in secrecy. Secondly, it does not work: for example,

41

under the guiding hand of structural assistance, Africas income dropped by 23 %.

[Source: Adapted from Gregory Palast, Observer, 29 April 2001]

Questions:
a) With reference to the article, define the following terms highlighted in bold:
i. privatisation,
ii. capital market liberalisation;
iii.
subsidies;
iv. capital flight;
v. free trade.
[2 marks]
b) Using a supply and demand diagram, explain why market-based pricing may result in
higher prices.
[4 marks]
c) Using the article and your own knowledge of economics evaluate the view that the
IMF and the World Bank policies are designed to further their interests of more
developed countries at the expense of less developed countries.
[8 marks]
Note:
The term "Structural Adjustment Program" has gained such a negative connotation that
the World Bank and IMF launched a new initiative, the Poverty Reduction Strategy
Initiative. Countries are now to develop Poverty Reduction Strategy Papers (PRSP).
While the name has changed, the World Bank and IMF are still forcing countries to adopt
the same types of policies as SAPs.
World Banks structural adjustment programmes often consisted of:
improved management public investments;
revised agricultural pricing policies (no longer maximum prices and guaranteed prices
producers);
revised industrial incentives;
reform of budget and tax system;
improvement of export incentives.
IMFs stabilisation programmes often consist of:
reduction of public sector / budget deficit;
devaluation of exchange rate;
liberalisation;
privatisation;
trade liberalisation;
creating more competition.

42

The IMF and the World Bank

The IMF and the World Bank are sister institutions in the United Nations system. They
share the same goal of raising living standards in their member countries. Their
approaches to this goal are complementary, with the IMF focusing on ensuring the
stability of the international financial system and the World Bank concentrating on longterm economic development and poverty reduction.
What are the purposes of the "Bretton Woods Institutions"?
The International Monetary Fund and the World Bank were both created at an
international conference in Bretton Woods, New Hampshire, U.S.A. in July 1944. The
goal of participants was to establish a framework for economic cooperation and
development that would lead to a more stable and growing global economy.
The IMF (also called Fund) promotes international monetary cooperation and provides
policy advice and technical assistance to help countries build and maintain strong
economies. The Fund also makes loans and helps countries devise policy programs to
solve balance of payments problems when sufficient financing on affordable terms cannot
be found to meet international payments. IMF loans are relatively short term and funded
mainly by the pool of quota contributions that members states provide.
The World Bank promotes long-term economic development and poverty reduction by
providing technical and financial support to help countries reform particular sectors or
implement specific projectsfor example, building schools and health centres, providing
water and electricity, fighting disease, and protecting the environment. World Bank
assistance is generally long term and is funded both by member country contributions and
through bond issuance.
How the Fund and Bank work together
The IMF and World Bank collaborate regularly and at many levels on assistance to
member countries and are involved in several joint initiatives. The terms for their
cooperation were set out in a concordat in 1989 to ensure effective collaboration in areas
where responsibilities overlap.
IMF assessments of a country's general economic situation and policies provide input to
the Bank's assessments of potential development projects or reforms. Similarly, Bank
advice on structural and sectoral reforms is taken into account by the IMF in its policy
advice. The staffs of the two institutions also cooperate when setting the conditions for
their respective lending programs.
The Managing Director of the IMF and the President of the World Bank meet regularly to
consult on major issues. They issue joint statements, occasionally write joint articles in
the world press, and they have made joint visits to several regions and countries.

43

During the 1990s, the IMF and World Bank together launched two major initiatives to
help poor countries. In 1996, the organizations introduced the Heavily Indebted Poor
Countries (HIPC) Initiative to reduce the external debt burdens of the most heavily
indebted poor countries.
In 1999, the IMF and the World Bank initiated the Poverty Reduction Strategy Paper
(PRSP) approacha country-led strategy for linking national policies, donor support, and
the development outcomes needed to reduce poverty in low-income countries. PRSPs
underpin the HIPC Initiative and concessional lending by the IMF and World Bank.
In July 2004, the Fund and Bank launched the Global Monitoring Report (GMR). This
annual report assesses progress on policies and actions needed to achieve the UN
Millennium Development Goals (MDGs). The GMR also considers how well developing
countries, developed countries, and the international financial institutions are contributing
to the development partnership and strategy to meet the MDGs as reaffirmed at a summit
in Monterrey in March 2002.
The IMF and World Bank are also working together to make financial sectors in member
countries resilient and well regulated. The Financial Sector Assessment Program (FSAP)
was introduced in 1999 to identify the strengths and vulnerabilities of a country's
financial system and recommend the appropriate policy responses.

The IMF at a Glance

Fast Facts on the IMF
Membership: 186 countries
Staff: approximately 2,360 from 146 countries
Total quotas: US$333 billion (as of 2/28/10)
Additional pledged or committed resources: $600 billion
Loans committed (as of 2/28/10):
US$191 billion, of which US$121 billion have not been drawn
Biggest borrowers (credit outstanding as of 2/28/10):
Romania, Hungary, Ukraine
Original aims: Article I of the Articles of Agreement sets out the IMFs main goals:
promoting international monetary cooperation;
facilitating the expansion and balanced growth of international trade;
promoting exchange stability;
assisting in the establishment of a multilateral system of payments; and
making resources available (with adequate safeguards) to members experiencing
balance of payments difficulties

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The IMFs responsibilities

The IMF's primary purpose is to ensure the stability of the international monetary system
the system of exchange rates and international payments that enables countries (and
their citizens) to buy goods and services from each other. Following the 2008 crisis, the
Fund is clarifying and updating its mandate to cover the full range of macroeconomic and
financial sector policies that bear on global stability.
Surveillance of economies
To maintain stability and prevent crises in the international monetary system, the IMF
reviews national, regional, and global economic and financial developments through a
formal system known as surveillance. The IMF provides advice to its 186 member
countries, encouraging them to adopt policies that foster economic stability, reduce their
vulnerability to economic and financial crises, and raise living standards.
Financial assistance
IMF financing is available to give member countries the breathing room they need to
correct balance of payments problems. A policy program supported by IMF financing is
designed by the national authorities in close cooperation with the IMF, and continued
financial support is conditional on effective implementation of this program. To help
support countries during the global economic crisis, the IMF has strengthened its lending
capacity and has approved a major overhaul of how it lends money.
In low-income countries, the IMF provides financial support through its concessional
lending facilities. The IMF has doubled loan access limits and is boosting its lending to
the worlds poorer countries, with interest rates set at zero until 2012.
SDRs
The IMF issues an international reserve asset known as Special Drawing Rights that can
supplement the official reserves of member countries. Two allocations in August and
September 2009 increased the outstanding stock of SDRs almost ten-fold to total about
SDR 204 billion (US$313 billion). Members can also voluntarily exchange SDRs for
currencies among themselves.
Technical assistance
The IMF offers technical assistance and training to help member countries strengthen
their capacity to design and implement effective policies. Technical assistance is offered
in several areas, including tax policy and administration, expenditure management,
monetary and exchange rate policies, banking and financial system supervision and
regulation, legislative frameworks, and statistics.
Source: Factsheet The IMF at a Glance, 23 March 2010,
http://www.imf.org/external/np/exr/facts/glance.htm (viewed 24 March 2010)

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Light-weight BRICS
Jun 6th 2011, 11:29 by The Economist online
How IMF voting shares compare with global economic heft
MANY argue that IMF vote-shares (and the amounts countries are required to put
into the fund's kitty) should reflect countries' relative economic heft. At the moment,
however, that is far from being the case. Taken together, the economies of the
European Union countries amount to just under 24% of the global economy. The
economies of Brazil, Russia, India, China and South Africa together make up about
21% of world GDP. But the European countries have 32% of the votes in the IMF,
while the BRICS have 11%. No wonder the BRICS' representatives to the fund issued
a rare joint statement deploring Europe's lock on the top job at the IMF, which is
made possible in part by the fact that Europe and America between them have
nearly 50%of the votes in the IMF's board. Proportionately, sub-Saharan Africa,
(excluding South Africa) is the most over-represented region, with 3.1% of the vote
but a mere 1.35% of the world economy.

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The IMF and the World Trade Organization

What objectives do the IMF and the WTO have in common?
The IMF is an international organization of 186 countries that works to ensure the
stability of the international monetary and financial system. The IMFs mandate includes
facilitating the expansion and balanced growth of international trade, promoting
exchange stability, and providing the opportunity for the orderly correction of countries
balance of payments problems. The IMF was established in 1945.
The WTO is an international organization of 153 members that deals with the rules of
trade between nations. The WTO works to help international trade flow smoothly,
predictably, and freely, and provides countries with a constructive and fair outlet for
dealing with disputes over trade issues. The WTO came into being in 1995, succeeding
the General Agreement on Tariffs and Trade (GATT) that was established in 1947.
The work of the IMF and the WTO is complementary. A sound international financial
system is needed to support vibrant international trade, while smoothly flowing trade
helps reduce the risk of payments imbalances and financial crisis. The two institutions
work together to ensure a strong system of international trade and payments that is open
to all countries. Such a system is critical for enabling economic growth, raising living
standards, and reducing poverty around the globe.
How the IMF and the WTO work together
The IMF and the WTO work together on many levels, with the aim of ensuring greater
coherence in global economic policymaking. A cooperation agreement between the two
organizations, covering various aspects of their relationship, was signed shortly after the
creation of the WTO.
The IMF has observer status in certain WTO bodies, and may participate actively in
meetings of certain WTO committees and working groups. The WTO is required to
consult the IMF when it deals with issues concerning monetary reserves, balance of
payments, and foreign exchange arrangements. For example, WTO agreements allow
countries to apply trade restrictions in the event of balance of payments difficulties. The
WTOs Balance of Payments Committee (BPC) bases its assessments of restrictions on
the IMFs determination of a members balance of payments situation.
Informal consultation between IMF staff and the WTO Secretariat takes place regularly
regarding trade policy developments and advice for individual countries. The IMF and
WTO also regularly share data and research.
It is likely that cooperation and consultation between the IMF and WTO will intensify,
given the increased areas of mutual support and overlap between the two institutions. The
Fund supports the multilateral trade reform efforts under the Doha Development Agenda.
Source: A Factsheet - March 2010, http://www.imf.org/external/np/exr/facts/imfwto.htm (viewed 24 march 2010)

47

Evaluate the role of multilateral organizations like the World Bank and the IMF in
assisting the economic development of Heavily Indebted Poor Countries.
Answers may include:
overview of the assistance provided by the IMF such as financial assistance to correct
balance of payment deficits or structural adjustment programmes
overview of the assistance provided by the World Bank such as offering
developmental assistance to middle and poor-income countries
evaluation of assistance provided to HIPC
evaluation of impact on economic growth
evaluation of impact on development such as income distribution, reduction of
absolute poverty, income distribution
evaluation of impact on human development such as literacy, life expectancy, HDI
progress
evaluation of macro impact on unemployment, inflation, exchange rate, fiscal and
monetary stability, saving, investment, role of government
evaluation of impact on balance of payments performance such as current account
and capital account
critical approach towards the IMF and the World Bank
any money received may often not get to the intended recipients because of
corruption
IMF Lending: When can a country borrow from the IMF?
A member country may request IMF financial assistance if it has a balance of payments
need when it cannot find sufficient financing on affordable terms to meet its net
international payments while maintaining adequate reserve buffers going forward. An
IMF loan eases the adjustment policies and reforms that a country must make to correct
its balance of payments problem and restore conditions for strong economic growth.
The changing nature of IMF lending
The volume of loans provided by the IMF has fluctuated significantly over time. The oil
shock of the 1970s and the debt crisis of the 1980s were both followed by sharp increases
in IMF lending. In the 1990s, the transition process in Central and Eastern Europe and the
crises in emerging market economies led to further surges of demand for IMF resources.
Deep crises in Latin America kept demand for IMF resources high in the early 2000s, but
these loans were largely repaid as conditions improved. IMF lending rose again starting
in late 2008, as a period of abundant capital flows and low pricing of risk gave way to
global deleveraging in the wake of the financial crisis in advanced economies.
IMF Facilities
Over the years, the IMF has developed various loan instruments, or facilities. Lowincome countries may borrow at a concessional interest rate through the Poverty
Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF).

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Except for the PRGF and the ESF, all facilities are subject to the IMFs market-related
interest rate, known as the rate of charge.Source: http://www.imf.org/external/np/exr/facts/howlend.htm
(published 9 September 2009, viewed 24 march 2010)

49

About the World Bank

The term world bank was first used in reference to the International Bank for
Reconstruction and Development (IBRD) in an article on the Bretton Woods conference
in The Economist on July 22, 1944. The first meeting of the Boards of Governors of the
IBRD and the International Monetary Fundheld in Savannah, Georgia, in March 1946
was officially called the World Fund and Bank Inaugural Meeting. And several news
accounts of this conference, including one in The Washington Post, used the term world
bank. What began as a nickname became official shorthand in 1975 for the IBRD and
the International Development Association together.
The term "World Bank" refers only to the International Bank for Reconstruction and
Development (IBRD) and the International Development Association (IDA). The term
"World Bank Group" incorporates five closely associated entities that work
collaboratively toward poverty reduction: the World Bank (IBRD and IDA), and three
other agencies, the International Finance Corporation (IFC), the Multilateral Investment
Guarantee Agency (MIGA) and the International Centre for Settlement of Investment
Disputes (ICSID).
The World Bank is like a cooperative in which 185 member countries are shareholders.
Under the Articles of Agreement of the International Bank for Reconstruction and
Development (IBRD), a country must first join the International Monetary Fund (IMF)
prior to becoming a member of the Bank. Membership in IDA, IFC and MIGA is
conditioned upon membership in IBRD.
According to the Articles of Agreement, the five largest shareholders, France, Germany,
Japan, the United Kingdom and the United States, each appoint an executive director,
while other member countries are represented by 19 executive directors who represent
constituencies in several countries. Each of the directors is elected by a country or group
of countries every two years. It is customary for election rules to ensure that a wide
geographical balance is maintained on the board.
The Bank president is nominated by the executive director of the largest shareholder in
the bank, the United States. The president is elected by the board of governors for a fiveyear, renewable term. By a long-standing, informal agreement, the president of the bank
is a United States national, while the managing director of the International Monetary
Fund is a European.
The World Bank raises money in several different ways to support the low interest and no
interest loans (credits) and grants that the World Bank (IBRD and IDA) offers to
developing and poor countries. IBRD lending to developing countries is primarily
financed by selling AAA-rated bonds in the world's financial markets. IBRD bonds are
purchased by a wide range of private and institutional investors in North America, Europe
and Asia.

50

While IBRD earns a small margin on this lending, the greater proportion of income
comes from lending out own capital. This capital consists of reserves built up over the
years and money paid in from the bank's 185 member country shareholders. IBRD
income also pays for World Bank operating expenses and has contributed to IDA and debt
relief.
The World Bank often has a surplus at the end of the fiscal year, which is earned from the
interest rates charged on some loans and from fees charged for some of our services.
Some of the surplus goes to IDAthe part of the bank that provides grants and interest
free loans to the world's poorest countries. The rest of the surplus is either used for debt
relief for heavily indebted poor countries, added to financial reserves, or helps us respond
to unforeseen humanitarian crises.
Why is there still so much poverty after 60 years of the World Bank's existence?
For the Bank, the bottom line is that there has been progress, but there has not been
enough. The World Bank has stated to continue to do all they can to make sure successful
projects and approaches are shared more widely so there's a greater impact on poverty
reduction. At the same time, they claim to have learned from past mistakes and constantly
work to improve our policies and programs. While poverty still exists, much progress has
been made:
Over the past 40 years, life expectancy in developing countries has risen by 20 yearsabout as much as was achieved in all of human history prior to the mid-20th century.
Over the past 30 years, adult illiteracy in the developing world has been nearly halved
to 25%.
Over the past 20 years, the absolute number of people living on less than one dollar a
day has begun to fall for the first time, even as the world's population has grown by
1.6 billion people.
Over the last decade, growth in the developing world has outpaced that in developed
countries, helping to provide jobs and boost revenues poor countries' governments
need to provide essential services.
The bank has assisted the nations of the former Soviet Union and Eastern Europe in
developing their economies to the point at which a large group of these countries
Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia
qualified for and were admitted to membership in the European Union in 2004.
Bulgaria and Romania joined in 2008 and Croatia is currently a candidate for
membership.
Part of the eradication of river blindness in 11 West African nations
Facilitated Chinas entry into the global economy in the late 1970s and early 1980s
through advice and lending.
Helped India overcome famine in the 1960s through support for its green
revolution, which substantially increased the production of such crops as rice and
wheat by introducing new strains of highyield seeds.

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Why has the World Bank made infrastructure a priority?

Infrastructure is crucial for the development of any country. It is about delivering the
essential services that people need to maintain a basic standard of living: water supply,
sanitation, electricity, roads, and telecommunications, which in turn lead to improvements
in health, access to education, and expanded economic opportunities. But for millions of
people, these basic services are still beyond reach.
During the 1990s, the World Bank reduced its lending for infrastructure with the
expectation that private sector investment in infrastructure would increase. However, the
high cost of such investments prevented the private sector from stepping in.
Recognizing that infrastructure is a key element in a countrys economic growth, which
in turn greatly affects poverty reduction, the Bank has begun to take on new infrastructure
projects. Like the rest of the development community, the Bank realizes that
infrastructure services are important to reach the Millennium Development Goals.
Why is there so much criticism of the World Bank?
According to the World Bank website:
Our role in development and in the wider globalization of the world's economy has often
been misunderstood. On one hand, this occurred because we did not explain the Bank's
mission or our work very well. On the other, critics tried to blame the bank for any or all
of the perceived problems associated with globalization-the growing integration of
economies and societies around the world resulting from increased flows of goods,
services, capital, technology, and ideas-an economic force that the World Bank does not
control. Also, protests drew worldwide attention to the problem of extremely high
multilateral debt levels carried by very poor countries, which high income countries
ultimately agreed were unsustainable and stifled the ability of poor countries to both pay
those debts and combat poverty. This led the World Bank and International Monetary
Fund to form the Debt Initiative for Heavily Indebted Poor Countries (HIPC) and to
further financial pledges by high income countries to assist the World Bank to carry out
debt relief efforts for heavily indebted poor countries.
Our mission is to help developing countries and their people reach the goals by working
with our partners to alleviate poverty. To do that we concentrate on building the climate
for investment, jobs and sustainable growth, so that economies will grow, and by
investing in and empowering poor people to participate in development.

52

53

Find below useful points to consider in an answering evaluation questions asking you to
compare and contrast the roles of aid and trade in economic growth and development.
You must be able to explain the concept of development. It is not sufficient to simply
define development. You need to clearly demonstrate how the points you explain can
actually contribute to development. The better responses will distinguish between the
effect of aid / trade on growth and the effect of aid / trade on development.
You should be able to explain whether the asked for strategy (aid, trade, import
substitution, export promotion (export-led growth), trade liberalization,
interventionist policies and / or market-oriented policies) is the most effective way to
bring about development versus other ways of achieving development (e.g. trade vs.
aid).
Better responses will discriminate between the effects of different types of aid. The
impact of humanitarian aid can not be compared with the effects of project aid or
programme aid.
In the case of aid, you might want to investigate the different effects on the donor and
the recipient country. To be aware of real-world examples will strengthen your
answer. The news sections of the IMF, World Bank or UN websites can provide you
with useful information.
Assistance from other countries can enable countries to improve their infrastructure,
stock of capital goods, education and health care. However, aid is not always given
appropriately and will not raise living standards in that case. An example might be to
provide capital for high-technology equipment to a very poor and overpopulated
agricultural country. The technology and trained labour force required to use this
equipment may not exist. Capital which takes advantage of the comparative
advantages of this country (climate, natural resources, labour intensive production)
are likely to have a larger effect.

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