Foreign Aid: Chirstmas presents for developing countries? Ho Hoang Hai Le Thanh Nhan Nguyen Duc Thang Nguyen Thi Thu Thuy Nguyen Truc Van MDE 10

Introduction Foreign aid plays an significant role in developing countries: –transfer, contribute ideas about development policy –train for public policymakers –finance to support reform –expand public services –an important factor for sector transformation

Introduction However, there are some arguments that foreign aid does not contribute significantly to economic progress in developing countries –divert money to nonproductive activities –do not have the technical or administrative ability to absorb and use it properly –poorly conceived and planned

Theory background Harrod – Domar growth model –The growth process depends on the ability to mobilize the accumulation of physical capital –the lack of savings: capacity to generate savings due to their low per capita income

Theory background Chenery and Strout two – gap model –Savings gap –Foreign exchange gap  foreign aid flows are needed to fill two gap  grow faster than their internal resource would allow

Definitions of development aid Development aid: –The economic assistance or other types of support provided to developing countries to promote or encourage advancement in living standards, institutions, infrastructure, agricultural practices and other aspects of an economy, and to resolve problems typically associated with developing countries. (Source: ODE).

Two types of aid: –Official Development Assistance (ODA): a subset of the official development finance and comprises grants plus concessional loans that have at least a 25 percent grant component “Foreign aid” to the poorest countries Definitions of development aid

Two types of aid: –Official Development Finance: all financing that flows from developed country governments and multilateral agencies to the developing world. interest rates close to commercial rates Definitions of development aid

Case study: Vietnam growth and foreign aid After “Doi moi” since late 1980s: –high annual growth (8-9% from 1991 – 1997) –low level of poverty –developmental aid generally declined, globally and in Asia, but rose in Vietnam

Case study: Vietnam growth and foreign aid Series Aid per capita (current US$) Exports of goods and services (% of GDP) FDI, net inflows (BoP, current miilion US$) 1,2981,3001,4001,450.. GDP growth (annual %) Gross capital formation (% of GDP) Source: World Development Indicators database

Case study: Vietnam growth and foreign aid On December 07 th, 2005: –Meeting of consulting group for Vietnam –Agreement of donors: 3.7 billions USD

Debates Aid has failed to ‘fill the gap’: –Crowded out private sector investments –Undermined democracy –Enabled despots to continue with oppressive policies, perpetuating poverty  Counter-productive

Debates Aid has failed to ‘fill the gap’, reason: –lack of infrastructure? –lack the institutions of the free society? –Other?

Case study: Aid fails to fill the gap in Africa $400 billion of aid from 1970 to 2000 percentage of GNI: 5% (1970) – 18% (1995) inverse relationship between aid and growth  Growth is higher in periods when the aid-to-Gross National Income ratio falls? savings ratio has actually fallen when aid has increased

Case study: Aid fails to fill the gap in Africa

Debates Foreign aid and achievement –economic reform –poverty reduction –quality of living –attractive environment of investment –technology & management tranfer

Debates Requirements: –good policy environment –low level of curruption –open economy –efforts to improve economic institutions –public services

Conclusions Foreign aid plays important role It’s not only the money, but ideas. Midwife of reforms Efforts of government. Remember: stand steady on your legs!