FOREIGN AID AND THIRD WORLD DEVELOPMENT

1. Can LDC’s rely on assistance from developed countries for their development? FOREIGN AID AND THIRD WORLD DEVELOPMENT

2. Presenated By……………………. • Sadia Afrin • Tawfiq Mohammad Hasan • Shidratul Moontaha Suha • Course No. -DS 201 • Course teacher – • Rounak Jahan • Course Name- • Development Economics. • Dept. of Development Studies

3. Aid, such as economic or military assistance, offered by one nation to another. [The American Heritage® Dictionary] Organization for Economic Co-operation and Development (OECD) defines Overseas development assistance (ODA) as resources transferred on concessional terms to promote economic development and welfare of people in developing countries Defining Foreign Aid

4. Loan,Grant ? • Grants are loans offered on very favorable terms. • An arrangement in which a lender gives money or property to a borrower and the borrower agrees to return the property or repay the money , usually along with interest…….This called loan. • To become an aid a loan must have concession i.e. with a grant element of 25%.

5. But there are critics

7. So in Reality!! • Foreign Aid is ……….. Taxing poor people in rich countries for the benefit of rich people in poor countries. [Bernard Rosenberg] • “I have long opposed foreign aid programs that have lined the pockets of corrupt dictators, while funding the salaries of a growing, bloated bureaucracy.” U.S. Senator Jesse Helms, January 11, 2001.3

8. The categories of Foreign Aid • Bilateral Aid: Historically most aid has been given as bilateral assistance directly from one country to another. • Multilateral Aid: Donors also provide aid indirectly as multilateral assistance, which pools resources together from many donors. The major multilateral institutions include the World Bank; the International Monetary Fund; and various United Nations agencies such as the United Nations Development Program.

9. The categories of Foreign Aid • Development Aid: • Transfer of finance, commodities etc. • Technical co-operation: Bangladesh-China Friendship Bridge over the river Buriganga. • Debt relief:

10. The categories of Foreign Aid • Humanitarian Aid: • Compensation for past injustices • Uneven distribution of global natural resources • Moral obligation to help the poor improve their nutritional status and standard of living

11. The categories of Foreign Aid • Food Aid • offered to countries facing food shortages Food Aid to Ethiopia in 1983

12. Foreign Aid supplement local savings in the case of a negative savings gap enhancing investment which makes possible expansion in productive capacity. It furnishes foreign exchange for essential imports such as machinery fuel and food by filling in the foreign exchange gap. Aid builds large construction projects(Bangabandu Bridge over Jamuna) Benefits from foreign development assistance

13. Motives For Giving Foreign Aid

14. Motives for Giving Aid • Political 1. Strategic self interest: US provided Aid to Egypt to support the 1979 Camp David Peace Agreement, US and USSR during the cold war. 2.Buy friends: US Aid to Pakistan 3. Security assistance: US Aid to Israel • Economic self-interest • Develop markets for developed country’s goods • Dispose of surpluses

15. Economic objectives (Germany and Japan) A mission to maintain close relationships (France and Britain) Relief and Reconstruction after disasters(Tsunami) National Security Concerns (USA) Motives for giving AID

16. Who are the Leading donor Agencies • Save the Children • CARE • World Vision • All UN Organizations • USAID • AusAid • Sida • Danida • European Union • Japan

17. The Two Gap Model • The Saving Constraint/Gap: Starting with the identity that capital inflows add to investible resources ; I<=F+sY F= Capital inflow sY= Domestic Saving I= Domestic Investment

18. The Two Gap Model 2. The Foreign Exchange Constraint/Gap: LDC investment has a import share m1, and the marginal propensity to import out of a unit of non-investment GNI is given by the parameter m2; (m1-m2)I+m2Y-E<=F

19. Technical Assistance • Absorptive Capacity

20. Why LDC Recipients Accept Aid • Major reason is economic • Supplements scare domestic resources • Contribute to economic growth • Decide to have a long term Development • Military & Internal security • Past exploitation of Rich Nations

21. Role of NGO’s in Aid • Pros & cons of Multinational NGOs • Local NGOs have more concern • Like BRAC, Grameen Bank, ASA, Proshika etc

22. Role of NGO’s in Aid • Two Advantages: • Less constrained by political imperatives • Work directly with local people • One critical question for International NGOs

23. The Effect of Aid • Conditionalities might tip the balance in favor of officials in a government that favor reforms • Can improve domestic economic policies by inducing greater consistency over time. • An insurance that might guarantee that reforms and policies might not be reversed in the near future. • Foreign aids enable governments to pursue policies that retard growth and exacerbates poverty

24. The Effects of Aid • Foreign aid makes it easier for governments to restrict internal private investment so to serve their political interests. • Aid has often been applied to dictate unpopular and unsuitable external development models. • Aid breeds dependency and promotes the belief that economic improvement depends on circumstances and influences outside one’s control • The influx of money from aid drives up the exchange rate and adversely affects inflation at home and foreign trade competitiveness

25. Some obvious features of Foreign Aid to Bangladesh • The flow of foreign aid to Bangladesh dwindled drastically and dropped to $1.03 billion in the fiscal year 2003-04, which was the lowest in two decades and a half • The Aid Group of Bangladesh officially known as " Local Consultative Group" is comprised of 32 bilateral and multilateral donors where World Bank occupy the leading position • The record of success of foreign aid in poverty alleviation is more frustrating than what one usually thinks about it • Foreign aid has facilitated the expansion of the capitalist market economy and the culture of consumerism

26. Some obvious features of Foreign Aid to Bangladesh • The obvious phenomenon of "aid-dependent consumerism" has serious implication for the economy, especially for savings and investment. • An unfortunate troubles with foreign aid is that loan components have surged significantly over the last decade. • The share of loan in the foreign aid package has swelled to 68 percent in the 2005-06 fiscal year from 11 percent in 1972-73. • The share of grants which was 89 percent in the fiscal year 1972-73 has now declined to 32 percent

27. The real picture on the ground • Bangladesh has found it difficult to force a faster rate of poverty reduction beyond the average of 1% throughout the 1990s. • 49.8 % of the total population lives below the poverty line, i.e., take less than 2,200 kcal a day per head • 19.98 % of the population suffer from hard-core poverty, i.e. take less than 1,800 kcal a day per head

28. The real picture on the ground • The national income share of the bottom five per cent of the population has declined from 1.03 per cent to 0.67 per cent, while that of the top five per cent increased from 18.85 per cent to 30.66 per cent; and that of the bottom 20 per cent declined from 6.52 per cent to 2.21 per cent, while that of the top 20 per cent increased from 44.87 per cent to 55.02 per cent

29. Bangladesh produces the best quality jute due to its comparative advantage in quality soil and natural environment conducive for jute cultivation. • In 1855 • By 1900 Case study: “Jute sector in Bangladesh”

30. Establish : 1952 Location: Narayangonj Distance: 25 km Area : 298 acres Production capacity :96 thousands tones Num. of workers : 32000 (In 2002) Adamjee Jute Mills: The largest in the world

31. Jute Sector Adjustment Credit (JSAC), the largest amount of WB loan to Bangladesh The people of Bangladesh are burdened with more debt for not establishing new factories or promoting older ones either in public or private sector but downsize or close them The amount taken as credit from the World Bank to close down or downsizing Jute manufacturing units was more than the amount losses in thirty years from Adamjee Jute Mills Death of Adamjaee Jute Mills: A postmortem

32. During the last 30 years (1972-2002): earned 3 thousand 704 crores Taka in which 2 thousand 238 cores of foreign currency given 900 crores of Taka to the government; paid Taka 370 crore as interest of the bank loans; Taka 200 crores as electricity bills 6 thousand students studying in 5 schools 40 thousand workers; 30 thousand people around the Adamajee; the number is almost 500,000 if family members are counted 10 million farmer's family who were dependent on amount of the demanded by the jute mills We do not know what happened to

33. Bangladesh lost some of its major buyers such as Ghana, Syria, Iran, and Sudan because of the closure of jute mills. These buyers have now moved to India. The World Bank: ‘Partner’ or ‘Destroyer’?

34. Total production (in tones) Con… Year 1972-’73 1982-’83 2005-’06 • Over 450,000 • 563,000 • 242,000 • Bangladesh starts losing its foreign jute markets to India.

35. By the name of financial help …developing countries are making profit from LDC’s, but what are we gaining? Last thought