Foreign Aid

Question 1

What do the MRU suggest about Foreign Aid that works?

Answer 1

• “Green Revolution”- saved 1bn from starvation with food
• Not always growth-driven; Oral rehydration reduces GDP growth but improves Standard of Living
• Bed-nets meant that Kenyan Postneonatal deaths halved
• If Governments have no incentive to be corrupt with items then it works well
• Information Provision is also helpful
• Immigration: Remittances are beneficial as Donors have better information

Question 2

MRU’s basic facts about Donors and Recipients

Answer 2

• No correlation between aid and GDP
• Associated States (Palau/Micronesia) receive a lot and nations with high natural disaster rate
• Aid isn’t just for growth (Military/Welfare)
• Increase in tied aid; recipient will buy goods/services from Donor
• Grants and Loans usually untied, but food aid remains a large source for the US

Question 3

What do Racshky and Schwindt say about Aid, Catastrophes and the Samaritans Dilemma?

Answer 3

• Estimate the impact of aid on death tolls via natural disasters
• Aid ‘Crowds Out’ the recipient Government to provide its own spending to improve the after-effects
• Samaritan’s Dilemma: People don’t act altruistically because of over-reliance
• Crowding-Out effects are stronger in less developed and more corrupt nations

Question 4

What does the MRU say about whether Foreign Aid causes Growth?

Answer 4

• Theory of the ‘Big Push’- economies need to be kick-started to cause long-term growth
• Doesn’t always work: Reliance and Corruption of some nations
• Solow model suggests that National Capital Stocks are steady when Depreciation = Investment
• Greater Foreign aid increases Capital Stock- Greater GDP
• However, if the fundamentals don’t change, , Depreciation > Investment
• This just causes negative waste

Question 5

What does Rosling say about Why the World is Better Off than we Think?

Answer 5

• In 1960, only 1/3 of the world were living on $10/day
• Absolutely, 6/7 have a good life- electricity, contraception, education, vaccination
• Should donate more to the UNHCR to stop migration to European nations

Question 6

What does Ostrom suggest are the reasons for limitations of Foreign Aid?

Answer 6

• Issues of Provision of public goods
• Protection and maintenance of Common Goods
• Type of Government Regime and Corruptions

Question 7

What are the 2 main issues with Foreign Aid?

Answer 7

• Incentive Problem: Donors may have an ulterior motive, Recipients may misuse aid
• Knowledge Problem: Donors don’t know what to give to who, Recipients don’t know how to distribute and make use of aid