Core - Chapter 2 - The Impact of Aid and Debt Relief

Question 1

Give some examples of when aid is effective

Answer 1

• it provides humanitarian relief
• it provides external resources for investment and finances projects that could not be undertaken with commercial capital
• project assistance helps expand much-needed infrastructure
• aid contributes to personnel training and builds technical expertise
• aid can support better economic and social policies

Question 2

Give some examples of when aid is ineffective

Answer 2

• might allow countries to postpone improving economic management and mobilization of domestic resources
• can replace domestic saving, direct foreign investment and commercial capital as the main sources of investment and technological development
• provision of aid might promote dependency rather than self-reliance
• some countries have allowed food aid to depress agricultural prices, resulting in greater poverty in rural areas and dependency on food imports (has also increased the risk of famine in the future)
• aid is sometimes turned off and on in response to the political and strategic agenda of the donor country, making funds unpredictable, which can result in interruptions in development programs
• the provision of aid might result in the transfer of inappropriate technologies or the funding of environmentally unsound projects
• emergency aid does not solve the long term economic development problems of a country
• too much aid is tied to the purchase of goods and services from the donor country, which might not be the best or the most economical
• a lot of aid does not reach those who need it, the poorest people in the poorest countries

Question 3

What problems did developing countries that borrowed in the 1970s and 1980s, encouraged by western lenders, run into?

Answer 3

• low growth in industrialized countries
• high interest rates between 1975 and 1985
• a rise in oil prices
• falling commodity prices

Question 4

What has been done to deal with the developing countries indebtedness?

Answer 4

The World Bank has lent more through its concessional lending arm
The International Development Agency has given loans for up to 50 years without interest but with a 3-4% service charge
Lending has risen from $424 million in 1980 to $2.9 billion, plus a further $928 million through the African Development Bank
The IMP has also introdued a soft loan facility conditional on wide-ranging socio-economic reforms

Question 5

What are Structural Adjustment Programs (SAPs) designed to do?

Answer 5

To cut government expenditure, reduce the amount of state interrvention in the economy and promote liberalization and international trade

Question 6

What four main elements do the SAPs consist of?

Answer 6

1. Greater use of a country’s resource base
2. Policy reforms to increase economic efficiency
3. Generation of foreign income through diversification of the economy and increased trade
4. Reducing the active role of the state

Question 7

What are the two main groups that the SAP measures are divided into?

Answer 7

Stabilization measures - short-term steps to limit any further deterioration of the economy (e.g. wage freezes; reduces subsidies on food, health and education)
Adjustment measures - longer-term policies to boost economic competitiveness (e.e. tax reductions, export promotion, downsizing of the civil service, privatization, economic liberalization)

Question 8

Describe some achievements of the developing world

Answer 8

• average real incomes in the poor world have more than doubled in the past 40 years despite population growth
• under-5 death rates have been cut by 50% or more in every region over the past 40 years
• average LE has risen by more than one-third in every region since 1950
• the percentage of people with access to safe water supply has risen from about 10% to 60% in rural areas of the developing world since 1975

Question 9

What are the two main objectives of the Heavily Indebted Poor Countries (HIPC) initiative?

Answer 9

• to relieve certain low-income countries of their unsustainable debt to donors
• to promote reform and sound policies for growth, human development and poverty reduction

Question 10

What are the two steps of debt relief?

Answer 10

1. at the decision point, the country gets debt service relief after demonstrating adherence to an IMF program and progress in developing a national poverty strategy
2. at the completion point, the country gets debt stock relief upon approval by the World Bank and the IMF

Question 11

What should MEDCs do to help countries diversify and expand trade?

Answer 11

• increase official development assistance
• remove tariffs and quotas on agricultural products, textiles and clothing exported by developing countries
• finance debt reduction for HIPCs having reached their completion points to ensure sustainability