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Development Assistance

Development Assistance. ECON 3508 December 3, 2007. Official Development Assistance (ODA) or "Foreign Aid“ 1. Definition: What is "Aid" Concept and Measurement 2. Donor Motives for Providing "ODA" 3. Ethical Justification 4. What Can "Aid" Accomplish?

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Development Assistance

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  1. Development Assistance ECON 3508 December 3, 2007

  2. Official Development Assistance (ODA) or "Foreign Aid“ 1. Definition: What is "Aid" Concept and Measurement 2. Donor Motives for Providing "ODA" 3. Ethical Justification 4. What Can "Aid" Accomplish? 5. Possible Negative Impacts of ODA (Aid) 6. Historical Evolution, Magnitudes, and Patterns; 7. Canadian “Aid” 8. How Can Development Assistance Be Improved?

  3. 1. Definitions: “ What is Aid or ‘ODA’ ” • Official (Governmental), NGO, and Private Grants plus Highly Concessional Loans (grant component) • Aimed at Transferring Resources • In Currency or In Kind; • “ Pro-Developmental” or Emergency Relief, not “Welfare” • Non-Commercial from Donor Perspective

  4. 2. Historical Evolution 3. Donor Motives for Providing ODA

  5. 4. Ethical Justification: Should High Income Countries Provide Aid to Low-Income Countries? “First step towards world fiscal federalism”

  6. 5. What can Aid Accomplish? Aims at “Development” not Welfare • “ Gap-Filling Role: (foreign exchange, tax revenues, technological, managerial, entrepreneurial gaps) • A “Catalytic Role”? • Capacity-Building Role • Direct Basic Human Needs or MDG Filling Role • Emergency Relief & Reconstruction Role • Promote Re-Construction of War-torn Lands • An Investment in Shared Security as well as Prosperity?

  7. 6. Possible Negative Impacts of ODA • May permit recipients to pursue counter-productive or foolish policies • May Promote a “Dependency Welfare Syndrome”? • May deform domestic policies to accommodate priorities of donors • May permit donor to exercise inappropriate influence on recipient • May permit recipient country to shift resources to other undesirable areas

  8. Possible Negative Impacts of ODA, continued 6. Volatility of aid flows may be hurtful to recipient 7. May lead to appreciation of exchange rate with damage to export activities (See Chart) 8. May provide discretionary funds for government that may promote corruption 9. May support dictatorial regimes that violate human rights in major ways

  9. Development Assistance to Selected Countries of Africa

  10. Magnitudes and Patterns: Richer but less generous…

  11. Donor Efforts

  12. But note: Previous numbers do not include donations to and through NGOs or Foundations (e.g. Gates Foundation, Oxfam, CARE, Red Cross……..) Nor “faith-based” organizations (Caritas, Mennonites, Vision, Aga Khan Foundation ……) Nor “private assistance” provided unofficially and usually anonymously by individuals.

  13. Aid is not always given to the poorest countries

  14. Problems of Aid “Quality” • Predictability and volatility • During 2001-03 the gap between commitments and disbursements exceeded 2% of GNI for 35 countries • Conditionality • Coordination • On average, a country in SSA dealt with more than 30 donors in 2002 • In 2002 Senegal hosted over 50 World Bank missions • In 2003 Zambia hosted 120 donor missions

  15. Tied aid: • Why “Tie” Aid? • Effects of “Tying” • Positive Effects of “Tying” ? • Solutions?

  16. What can we realistically expect development assistance to accomplish? Recall what can go wrong: • Aid ratification of counter-productive policies • “Dependency Welfare Syndrome”: Recipient country effort may be reduced • Donors priorities may dominate • Inappropriate donor influence • May permit recipient country to shift resources to other undesirable areas 6. Aid volatility may damage recipient 7. Appreciation of exchange rate may block exports, increase imports, & economic diversification 8. Discretionary & unearned funds for government may encourage & facilitate corrupt practices • May support dictatorships and human rights violations

  17. Conclude: • Aid alone can not achieve sustainable development • A useful support for domestic or national efforts. • Responsibility rests with developing countries themselves, not aid donors • Perhaps neither “sufficient” nor “necessary” but useful.

  18. Other factors are vital: • Governmental commitment to development objectives; • Reasonably incorrupt government • Equity orientation of public policy • Sound economic policies to strengthen and sustain an indigenous economic foundation • An “enabling environment” so that people can improve their own situations for themselves (e.g. re the informal sector, micro-credit ….” Question: Is representative democracy a necessary precondition or element?

  19. How Can Development Assistance Be Improved? Increase the Quantity of Development Assistance • More grants & fewer loans • Link Aid More Directly to Need • Further Debt Service Reductions? But note that this is no panacea and also creates additional problems and stresses

  20. Can More Aid be “Absorbed” or Used Effectively? • Would high levels of aid institutionalize dependence? • Would it lead to a collapse of domestic effort (e.g. taxation; F. Xch. earnings etc.)? • Would it promote “Dutch Disease” • Would it sap indigenous efforts and initiatives • Could it be used effectively? • Would donor priorities take over?

  21. 8. How Can Development Assistance Be Improved? Continued: For the Donors: Improve the “Quality” of Aid • A “Partnership” philosophy and approach • Orchestrate programs to avoid chaos, Use a “consortium”approach 3. Reduce administrative burdens placed on recipient governments 4. Minimize aid volatility & unpredictability 5. Reduce the tying of aid to donor suppliers 6. Increase untied budget support? Increased “Program Aid not Project Aid” 7. Emphasize capacity building

  22. How Can Development Assistance Be Improved? Continued: (b) for the Recipients: • Pursue wise, equitable and effective development strategies • Make a major domestic effort • “Take Charge” & “Own” the Program • Improve budget management and accountability; combat corruption; • Ensure effective management; • Avoid currency appreciation due to aid inflows (“Dutch Disease”)

  23. 7. Some Specific Issues: • Allocation of Burden among Donors • Allocation of Aid among Recipients • Aid, Poverty and Income Distribution • Executing Agencies: IFIs, Bilateral, Civil Society Organizations?

  24. Food Aid: Impact on Domestic Agriculture • Co-ordination of Aid Programs • Aid, Human Rights and "Bad" Political Regimes

  25. Development Assistance to Africa

  26. Africa receives about 50 per cent of total aid 0.40 0.36 140 0.35 0.33 120 0.30 0.30 0.26 100 ODA as a % 0.25 of GNI 80 (left scale) ODA (2004 $ billion) % of GNI 0.22 0.20 Total ODA 60 (right scale) 0.15 40 0.10 Total ODA to 20 0.05 Africa (right scale) 0.00 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1996 2007 1990 1991 1992 1993 1994 1995 2008 2009 2010 Source: OECD/DAC Statistics (2006). DAC Members’ ODA: 1990-2004 and simulations to 2006 and 2010, based on Monterrey and subsequentcommitments

  27. …with ODA increases driven by debt relief and emergency assistance Total net official development assistance (ODA), non-aid official flows and private flows in Africa, 1993-2004. (Source: OECD/DAC)

  28. The Canada Fund for Africa: Summary of Commitments

  29. The Canada Fund for Africa: Summary of commitments, continued:

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