1. AEB 4283: International Development Policy
Section III: International Problems and Policies
Week 13: Foreign Finance and Aid
Today, Monday:
Schedule Change Announcements:
Exam #3 will be on last week of class, Dec 5, Monday (original Nov 16)
Project paper deadline, Dec 7, Wednesday (original Dec 5), 5pm
Continue Chapter 14: “Foreign Finance, Investment, Aid, and Conflict: Controversies and Opportunities”
Finish lecture: “Foreign Finance and Remittances”
Start lecture on “Foreign Aid”
Wednesday:
Start Chapter 15: Finance and Fiscal Policy, read Chapter 15 as HW

2. Chapter 14 Foreign Finance, Investment, Aid, and Conflict: Controversies and Opportunities

3. 14.3 The Role and Growth of Remittances
A remittance is a transfer of money by a foreign worker to his/her home country
Wage differences
~ 5 times difference between DC and LDC for similar occupations
Loss of skilled workers (Brain Drain) is mitigated by remittances
Pathway out of poverty
Uneven flow of remittances

4. Figure 14.4 Sources of External Financing for Developing Countries, 1990–2008
In LDCS:
Remittances have increased, exceeds 5% of GDP, outpacing FDI and foreign aid flows

5. Implications of migration and remittances
Over the past decade, as private capital flows have declined, remittances have become increasingly prominent.
Worldwide remittance flows are estimated to have exceeded $232 billion in 2005, of which developing countries received $167 billion.
Remittances have doubled over the past ten years as a result of
(a) increased scrutiny of flows since the terrorist attacks of Sept. 2001
(b) reduction in remittance costs and expanding networks in the
remittance industry
(c) the depreciation of the U.S. dollar (which raises the value of
remittances denominated in other currencies)
(d) growth in the migrant population and incomes.
This amount, however, reflects only transfers through official channels that have been recorded in the balance of payments under workers’ remittances, compensation of employees, and migrant transfers.

6. Development implications of migration and remittances
Migration and remittances continue to increase
Migration generates substantial welfare gains and reduces poverty for migrants, as well as countries of origin and destination
The development gains from low-skilled emigration are clear cut, while high-skilled emigration has more complex effects
Benefits to countries of origin are mostly through remittances
There is considerable scope for reducing remittance costs faced by poor migrants, which would further increase the benefits of remittances
Costs of migration → relocating costs, social costs for destination countries and for those left behind in origin countries, and psychological costs for migrants spending lengthy periods away from their families

7. Downside
Large remittance flows may lead to currency appreciation (increase in value) and adverse effects on exports (expensive)
Remittances may create dependency
Some authors have argued that such outcomes may dampen economic growth
On the other hand, to the extent that they finance education and health, and alleviate credit constraints for small entrepreneurs, remittances may even increase growth
Remittance channels may be misused for money laundering and financing of terror – important to regulate

8. Policy priorities
Governments can provide information and regulate intermediaries to reduce risks, costs of migration
Investments in infrastructure and R&D, along with improved working conditions, would limit brain drain
High remittance costs faced by poor migrants can be reduced by increasing access to banking and strengthening competition in the remittance industry
Governments should not tax remittances or direct the allocation of expenditures financed by remittances

9. 3) Public and Private Development Assistance = Foreign Aid
Foreign Aid → any flow of capital to LDCs that meets two criteria:
Its objective should be non-commercial from the perspective of the donor
It should be characterized by concessional terms → interest rate and/or repayment period should be less stringent than normal commercial terms

10. Public and Private Development Assistance = Foreign Aid
Forms of Foreign Aid
Public (“official”) bilateral and multi-lateral assistance from governments = Official Development Assistance (ODA)
Can be directly from governments or funds channeled through Intergovernmental Organizations (IGOs)
Private (“unofficial”) assistance from Non-governmental Organizations (NGOs) and International Non-governmental Organizations (INGOs)

11. Public and Private Development Assistance = Foreign Aid
Public (“official”) bilateral and multi-lateral assistance from governments = Official Development Assistance (ODA)
Can be directly from governments or funds channeled through Intergovernmental Organizations (IGOs)
Net disbursements of loans or grants made on concessional terms (low interest rates) by official agencies of member countries of the OECD.
Conceptual and measurement problems
Total amts of foreign aid are difficult to track (loans vs. grants)
Military aid is normally excluded.

12. Table Official Development Assistance Net Disbursements from Major Donor Countries, 1985, 2002, 2008
Internationally agreed UN target is 0.7 % of GNI.
% of developed countries’ GNI allocated to ODA have improved since commitments from DCs at the G8 meetings in Britain in 2005.
Although US is largest donor in absolute terms, it provides lowest % of GNI

13. Official Development Assistance
Source: Organisation for Economic Co-operation and Development, Development Assistance Committee

14. Aid from the United States
How much do we give?
How much did the US give? … & the world? (Year 2007)
United States All Indust. Countries
total amount
≈ $21 billion/year $108 b./year
≈ $70 per US citizen ≈ $114 / citizen
as a percent of total national income
≈ 0.16% ≈ 0.30%
as a percent of government expenditure
≈ 0.79% (less than a cent of every $) ≈ 0.80%
AGEC Fall 99 14

15. Table 14.3 Official Development Assistance (ODA) by Region, 2008
South Asia, where 50% of the world’s poorest reside, only receive $8 per person per year in aid, while ME & NA with over 3 times per capita income, receives 9 times more aid than South Asia.
Pattern becomes clearer when examined by country (Iraq and Afghanistan largest recipient in 2008)

16. Table 14.3 Official Development Assistance (ODA) by Region, 2008
Bilateral aid largely based on political & military considerations
Multilateral aid (from World Bank, UN) more economically rational

17. Foreign Aid: The Development Assistance Debate
2001 onwards has seen a trend of increased aid, but much of it was due to geo-strategic concerns of the donor, such as fighting terrorism.
Why do donors give aid?
make the world safer, more prosperous, and more friendly
Political self interest (e.g., “National security interest”)
Strategic self interest
Economic self interest
Humanitarian interest

18. Foreign Aid: The Development Assistance Debate
Why do donors give aid?
Economic motivations:
Growth and savings (but the impact of investment aid has been historically low).
Technical assistance
Absorptive capacity (ability of the recipient country to use aid funds wisely and productively).
Self-interest (e.g., tied aid).
Tied aid: foreign aid in the form of bilateral loans or grants that require the recipient country to use the funds to purchase goods or services from the donor country.

19. Foreign Aid: The Development Assistance Debate
Why do LDC recipients accept aid?
Investment is a key component for development
Access to foreign capital is key for private sector and government investment and thus for economic growth in developing countries lacking strong domestic financial systems
They need it for short term needs or obligations
Combat hunger, natural disaster relief, war torn relief efforts
Helps strengthen LDC country political leaders and/or businesses in power
New opportunities exist for business to actively engage with the development community, participate in development processes, and influence the development agenda.

20. Foreign Aid: The Development Assistance Debate
Why recipient countries accept aid (because it is money!).
The role of nongovernmental organizations in aid (NGOs) – at times, they have proven to be more effective than governments. Example from case studies discussed in class?
The effects of aid
the overall record of ODA has not been very good – some even say it hurts developing countries by providing funds to corrupted regimes – William Easterly/Dambisa Moyo.

21. Can trade and investment replace foreign aid?
Not really, because:
Trade and investment opportunities are very unstable
Trade/investment and foreign aid provides different things:
Private firms’ investment provides commercial goods & services;
Government’s foreign aid provides public goods (better government policies, health, education, and economic growth)
Governments’ foreign aid can be a complement to private investment & trade, as aid supports growth which makes it profitable for firms to expand investment & trade
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22. Toward a New View of Foreign Aid
Dissatisfaction among donors and recipients may create the possibility for new aid arrangements (e.g., reduce tied aid).
Future aid is likely to be linked to market reforms and institutional capacity-building.
Aid effectiveness will be increasingly scrutinized.
See The Munk Debate on Foreign Aid:
Debate Teams: Hernando de Soto / Dambisa Moyo (Pro) and Stephen Lewis / Paul Collier (Con).
AGEC Fall 99

23. Searchers vs. Planners
According to THE WHITE MAN'S BURDEN, by William Easterly, foreign aid is more effective when implemented by Searchers instead of Planners.
Planners: e.g., George W. Bush’s adventures in Iraq.
Searchers:
the Arab Spring uprisings in Tunisia, Egypt, Yemen, Libya, Syria, etc.
NGOs such as WaterAid, Grameen Bank, Kiva, etc.
Social entrepreneurs: for good examples, read the book How to Change the World, by David Bornstein, Oxford University Press, 2007.
Ernesto Sirolli, Sustainable Development Expert
AGEC Fall 99

24. 14.5 Conflict and Development
The scope of violent conflict and conflict risks
The consequences of armed conflict
Health
Destruction of wealth
Worsening hunger and poverty
Loss of education
A torn social fabric
Uncertainties discourages investments and entrepreneurships, and encourages brain drain

25. Figure 14.5 Global Trends in Armed Conflict, 1946–2008
Costs of conflict → destroyed infrastructure, environmental collapse, lack of health and education, loss of social capital
Costs of conflict are high, so prevention even more important

26. 14.5 Conflict and Development (cont’d)
The causes of armed conflict and risk factors for conflict
Horizontal inequalities (inequalities among culturally defined groups).
Natural resources for basic needs
Struggle to control exportable natural resources

27. 14.5 Conflict and Development (cont’d)
The resolution and prevention of armed conflict
Importance of institutions; e.g. addressing commitment problems
Global actors
Regional actors: an Africa-wide approach
Appropriate leadership from national actors (e.g., Colombia under A. Uribe presidency).
Focus on education
Economic development