13.2 International debt and international aid Flashcards
two ways of expressing a country’s debt
- a ratio of debt to a country’s GDP
- ratio of a country’s external debt to the value of its exports
causes of debt
- through trade deficit, value of imports>exports for period of time so need funding
- result of currency devaluation/foreign exchange issues
- rising prices of key imported commodities, e.g oil crisis of 1973
- inability to make repayment on international loans, e.g Argentina unable to repay IMF
- due to war/conflict, e.g Ukraine has over $150 billion debt
- poor financial decision making by a gov due to inappropriate lending/borrowing in 1960s and excessive interest charges by creditors (e.g Argentina trying to develop infrastructure)
- following independence former colonies given large loans to develop infrastructure/internal industries to replace imports
- financial mismanagement of economy - high levels of military spending: e.g Iraq and Sadam Hussain for during war/conflict: about 100 billion
Example of UK local aid development project in LIC
Global Energy Transfer Feed-in Tariff (GETFiT) :
- main goal of assisting Uganda to pursue a climate resilient low-carbon development path by facilitating private sector investments in renewable electricity generation projects
- Programme budget: £25,800,000
Spend to date: £3,761,079
Successes:
1. Increased capacity: 156 MW of renewable energy to ugandas grid by 2021
2. job creation
3. mobilised over $450 million in private investment
4. CO2 reductions - estimated over 7 million tons over project lifetime
Example of UK emergency Aid
Turkey-Syria Earthquake (2023):
- 77 UK search and rescue specialists deployed in first 24 hours
- £43 million in humanitarian assistance
- UK emergency medical team deployed/supplies given out
Tied aid example
UK Aid to Malysia to build Pergau dam:
- very controversial
- cost $600 milion and UK funded approx £230 million in aid
revealed later that the aid given by the UK was linked to a £1 billion arms deal between the two countries, where Malaysia agreed to purchase British military equipment in exchange for funding
- contributed to establishment of International Development Act 2022, prohibited tying aid to military objectives
Oxfam case study - aid donors
founded in 1942
Funding:
institutions/gov: UK DfID, EU, UN
public fundraising
Spending:
- all of its money directly or indirectly fighting the injustice of poverty
- every £1 Oxfam spends, 81p goes on their emergency, development and campaigning work, 12p is spent on running costs and 7p is invested to generate future income
Local development project:
Balaka District, Southern Malawi :
- improved food security, empower women, strengthen community resilience to climate change
Impacts:
- 40% increase in crop yields - better soil management/drought resistant crops
- households incomes up by average 25%
Cost:
- estimated $800,000 to $1,250,000
Oxfam LIC emergency aid project
hunger crisis in South Sudan :
- conflict caused fuel price/cost of living to rise
- poor harvest in late 2017 = 7.1 million facing extreme hunger
Responses:
- Supporting over 500,000 people
- Regular emergency food distributions
- Distribution of vouchers for canoes
- wash services: water purification systems to 20,00 households
- food distribution: immediate relief: 25,000 individuals
- longer term: fast growing seeds to 10,000 farmers to enable quick recovery
advantages of aid
- can save lives/help rebuild communities and housing after a disaster
- provision of medical training, medicines and equipment can improve health/standards of living as well as provision of clean water
- aid for agriculture can improve farming techniques, increase food production/ improve quality/quantity of food available
- aid for industrial development can create employment/improve infrastructure supporting countries in developing natural resources/power supplies
bilateral aid
aid given directly by the government of a donor country to a recipient country
multilateral aid
given by donor country to an international organisation, e.g World Bank, who uses it to assist developing countryes
relief aid
solve short term problems in recipient country
development aid
aims to develop the long-term capacity of the recipient country to help itself
tied aid
where receiving aid is conditional on purchasing goods/services from donor country
disadvantages of ties aid for recipient countries
- Higher Costs: Recipients must purchase goods/services from the donor country, often at inflated prices.
- Inefficiency: Donor priorities may not align with recipient needs, leading to unsuitable projects or goods.
- Stifled Local Growth: Excludes local businesses, reducing opportunities for domestic industries to grow.
- Donor-Centric Benefits: Significant portions of aid flow back to donor economies, limiting benefits for the recipient.
- Administrative Burdens: Compliance with donor conditions increases bureaucracy and delays.
- Reduced Aid Effectiveness: Higher costs and rigid conditions reduce the overall impact of aid.
- Corruption Risk: Contracts often favor donor-linked firms, undermining transparency.
- Long-Term Issues: Can lead to debt accumulation and distorted development priorities.
advantages of tied aid
- Guaranteed Resources: Provides access to specific goods, services, or technology.
- Faster Implementation: Ready-made solutions can expedite project execution.
- Technical Expertise: Advanced skills, technology, and training from the donor.
- Improved Relations: Strengthens diplomatic and economic ties with the donor country.
- Supports Large Projects: Enables financing and expertise for large-scale infrastructure.
- Capacity Building: Local workforce benefits from training and knowledge transfer.
- Stable Supply Chains: Ensures reliable access to goods and services.
- Donor Accountability: Oversight may reduce the risk of fund mismanagement.
advantages of relief aid
- Immediate Assistance: Provides urgent help during crises (e.g., natural disasters, conflicts, or pandemics).
- Saves Lives: Offers essential supplies like food, water, and medicine to prevent loss of life.
- Supports Recovery: Helps stabilize affected areas by providing temporary shelters and rebuilding efforts.
- Prevents Further Crises: Mitigates risks like disease outbreaks or famine by addressing immediate needs.
- Boosts Local Morale: Demonstrates international solidarity, improving hope and resilience in communities.
- Quick Mobilization: Rapid deployment of resources and expertise to areas in need.
- Restores Infrastructure: Facilitates the repair of critical infrastructure, such as roads and hospitals, after disasters.
Disadvantages of Relief Aid
- Dependency Risk: Prolonged reliance on aid can undermine self-sufficiency.
- Inefficiency: Poor coordination may result in duplicated efforts or wasted resources.
- Short-Term Focus: Emphasis on immediate needs may overlook long-term development.
- Local Economy Disruption: Free goods can undercut local markets, harming local producers.
- Mismanagement: Aid may be diverted due to corruption or lack of oversight.
- Inappropriate Aid: Supplies or services may not align with the recipient’s actual needs.
- Cultural Insensitivity: Aid delivery may disregard local customs or social structures.
- Environmental Impact: Improper waste management of relief materials can harm the environment.
Advantages of Development Aid
- Economic Growth: Provides funding for infrastructure, industries, and projects that stimulate economic development.
- Poverty Reduction: Helps improve living standards by supporting health, education, and social programs.
- Capacity Building: Strengthens local institutions and human resources through training and education.
- Improved Healthcare: Provides access to better healthcare services, reducing disease and improving life expectancy.
- Infrastructure Development: Funds critical infrastructure projects such as roads, schools, and hospitals.
- Technology Transfer: Introduces new technologies and knowledge that boost productivity and innovation.
- Environmental Protection: Supports sustainable development practices and environmental conservation efforts.
- Social Stability: Helps reduce social tensions by addressing basic needs like food, water, and education.
Disadvantages of Development Aid
- Dependency: Long-term reliance on aid can reduce motivation for self-sufficiency and local initiative.
- Inefficiency: Mismanagement, corruption, or poor planning can result in wasted resources.
- Distortion of Local Markets: Aid can disrupt local economies by flooding markets with free or subsidized goods.
- Debt Accumulation: Loans as part of aid packages can lead to unsustainable debt burdens.
- Cultural Insensitivity: Aid programs may ignore local customs, needs, or priorities, leading to ineffective solutions.
- Political Influence: Aid may be tied to political or economic conditions that benefit the donor rather than the recipient.
- Unbalanced Development: Aid may focus on certain sectors or regions, leaving others underdeveloped.
- Environmental Impact: Some aid-funded projects may harm the environment due to inadequate planning or sustainability considerations.
Advantages of Bilateral Aid
- Tailored Assistance: Aid can be customized to meet the specific needs and priorities of the recipient country.
- Stronger Diplomatic Relations: Fosters closer ties between the donor and recipient countries, promoting political and economic cooperation.
- Direct Support: Allows for more effective monitoring and oversight, ensuring that aid reaches its intended recipients.
- Faster Implementation: Bilateral aid often leads to quicker disbursement and implementation of projects due to fewer intermediaries.
- Sustainability: Focuses on long-term development goals, such as infrastructure, healthcare, or education, aligned with the recipient’s development plans.
- Flexibility: Allows the donor and recipient to negotiate terms and conditions that are mutually beneficial.
- Leveraging Expertise: Donor countries often provide specialized knowledge, technical support, and resources in areas where they excel.
Disadvantages of Bilateral Aid
- Political Influence: Donor countries may use aid to advance their own political, economic, or strategic interests, which may not align with the recipient’s needs.
- Dependency: Recipients may become reliant on aid from one country, limiting their ability to develop independently.
- Conditionalities: Bilateral aid may come with strict conditions, such as adopting certain policies, which may not suit the recipient country’s context.
- Unequal Power Dynamics: The donor country may have more influence over how aid is used, leading to projects that benefit the donor more than the recipient.
- Lack of Coordination: Bilateral aid can sometimes result in duplication of efforts or inefficiency if not properly coordinated with other donors.
- Short-Term Focus: Some bilateral aid programs may prioritize immediate results over long-term sustainable development.
- Cultural Insensitivity: Donor-driven projects may not always consider the local culture, customs, or priorities, reducing their effectiveness.
Advantages of Multilateral Aid
- Broader Support: Multilateral aid comes from multiple countries and organizations, reducing reliance on a single donor and spreading risk.
- Larger Financial Resources: Collective contributions from various donors result in larger sums of money, enabling more extensive development programs.
- Expertise and Coordination: Multilateral organizations (e.g., UN, World Bank) bring technical expertise, experience, and effective coordination among various actors.
- Neutrality: Aid is often seen as more neutral, as it comes from a group of donors, reducing political influence from a single country.
- Global Development Focus: Multilateral aid focuses on global issues, ensuring a broader, long-term vision that addresses diverse challenges like health, education, and poverty.
- Greater Accountability: Multilateral organizations tend to have more rigorous monitoring and evaluation mechanisms, ensuring aid is used effectively.
- Shared Risk: By involving multiple donors, the financial risk is shared, making it easier for recipient countries to access aid.
Disadvantages of Multilateral Aid
- Bureaucracy: Multilateral organizations often have complex administrative processes, which can delay aid delivery and project implementation.
- Lack of Flexibility: Aid may be tied to specific conditions or global initiatives that don’t align with the recipient country’s immediate needs.
- Impersonal Assistance: Multilateral aid may not be as tailored to the specific context of the recipient country, making it less effective.
- Donor Influence: Although less politically driven than bilateral aid, multilateral aid may still be influenced by powerful donor countries, skewing priorities.
- Coordination Challenges: With multiple donors and stakeholders involved, coordination can become difficult, leading to duplication or inefficiency.
- Slow Decision-Making: Decision-making in multilateral organizations can be slow due to the need to reach consensus among diverse donors.
- Debt Accumulation: Some multilateral aid comes in the form of loans, potentially increasing the recipient country’s debt burden if not managed properly.
reasons for high levels of debt in Uganda
- civil war during 1970s, meant gov needed finance to purchase weapons
- during 1980s, global interest rates doubled, massively increasing repayment of loans
impact of debt repayments on Uganda
- education budget reduced by 12%
- tax increase- VAT from 18 to 19%: poorest 10% of Ugandans are spending 80% of their income on basic consumption, meaning any increase in taxes or inflation significantly reduces their purchasing power
- high inflation: 10.4%
- rising food prices = malnutrition
Impacts of debt cancellation on Uganda
- Spending on public services risen by 20% overall – 40% extra on education and 70% on healthcare
- free primary schooling: education
- 2.2 million gained access to clean water
what is the international debt crisis
- due to odious debt: due to HICs loaning to dictators/other corrupt leaders when it was known the money would be wasted
- colonialism left many former colonies with high/unfair levels of debt when they became independent: e.g Haiti had to pay France 150 million france to receive independence
- Arab-Israeli war of 1973-1974 saw sharp increase in oil prices and so resulted in high levels of investment by banks offering relatively low interest loans to poor countries and encouraged them to grow crops to pay back loans with exports
- however, recession in 1980s = rising inflation and interest rates in Western countries so demand for exports fell and meant LICs unable to pay back interest
strengths/weaknesses of debt relief
strengths:
- allow country’s loans to be reschedule to make them more manageable
- make country’s economy more competitive: important for growth
- improve FDI investment by removing trade/investment restrictions
- boost foreign exchange - promoting exports
- reduce gov deficit: cuts in spending
- increased gov spending in important areas such as education:
weaknesses:
- may result in moral hazard: govs just take out more loans if think they will be bailed out again in future
- only temporary solution: future problems
- political issues: if country still debted to loaner in other ways?
HIPC initiative
- heavily indebted poor countries - 39 developing countries with high levels of poverty and debt which are eligible for special assistance from World Bank and IMF
- provides debt relief and low-interest loans to cancel/reduce external debt repayments to sustainable levels
- to be considered must have unsustainable debt and assistance conditional on gov meeting range of targets
- 2005, US $40 billion debt in Africa cancelled after G8 summit meeting
Micro credit: Grassroots aid
Grameen Bank:
- small loans to very poor people for self-employment projects to generate income
- crop loan, livestock loan etc
- 94% villages in Bangladesh have Grameen branch
- very low interest
-97% to women
example of a private donor of aid
Bill and Melinda Gates Foundation:
- main focus: healthcare/poverty
- 7 billion in grants
- 40 programme strategies
China aid
One belt, one road initiative:
- massive trade/infrastructure project connecting dozens of economies
BUT
- punishing interest rates
- strings attached: market entry for cheap chinese goods/access to lucrative resources (oil/gas reserves in Kazakhstan)
- Chinese companies employ chinese people
- infrastructure contries dont need
