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Foreign Aid in Economic Development
Foreign aid is aimed at improving the social, economic and/or political conditions of developing countries by transferring funds or goods and services to them.
Foreign aid must be concessional and non-commercial.
Concessional foreign aid transfers occur under conditions which are more favourable than that which could be achieved in normal markets.
For example, if the foreign aid is a transfer of funds from one government to another (e.g., Sweden to Tanzania) in the form of a loan, then to qualify as being concessional, the loan repayments periods would be longer and the interest rates lower than commercial bank lending.
Further, foreign aid could take the form of grants – where goods and services and/or money is gifted and need not be repaid.
Foreign aid explained
Although services may be provided to help with refugee assistance, peacekeeping, military aid, and anti-terrorism, and so on, these are examples of assistance but not aid. These forms of assistance do not meet the criteria that is aimed at improving the social, economic and/or political conditions of developing countries.
There are two sources of foreign aid:
Those that supply foreign aid are ‘donors’ and those developing countries receiving foreign aid are ‘recipients’.
There are two main types of aid – humanitarian and development.
Humanitarian aid. Humanitarian aid is transfers of money (typically grants), goods and services, and logistic assistance to people who need help. It is usually short-term help until the long-term help by government and other institutions replaces it.
Among the people in need belong homeless, refugees, victims of natural disasters, wars and famines.
The primary objective of humanitarian aid is to save lives, alleviate suffering, and maintain human dignity. It may therefore be distinguished from development aid, which seeks to address the underlying socioeconomic factors which may have led to a crisis or emergency.
Who gives the most aid?
Humanitarian aid aims to bring short term relief to victims until long term relief can be provided by the government and other institutions.
Development aid. Development aid is financial aid given by governments and other agencies to support the economic, environmental, social, and political development of developing countries. It is distinguished from humanitarian aid by focusing on alleviating poverty in the long term, rather than a short-term response.
Another term that is used instead of development aid is development cooperation. Development co-operation, which is used, for example, by the World Health Organization (WHO) expresses the idea that a partnership should exist between donor and recipient, rather than the traditional situation in which the relationship was dominated by the wealth and specialised knowledge of one side. Most development aid comes from the Western industrialised countries, but some poorer countries also contribute aid.
Aid may be bilateral: given from one country directly to another; or it may be multilateral: given by the donor country to an international organisation such as the World Bank or the United Nations Agencies which then distributes it among the developing countries.
About 80-85% of developmental aid comes from government sources as official development assistance (ODA). The remaining 15-20% comes from private organisations such as non-governmental organisations (NGOs), foundations and other development charities (e.g., Oxfam).
In addition, remittances received from migrants working or living in diaspora form a significant amount of international transfer.
Development aid can consist of:
Humanitarian and development aid is a financial inflow into developing countries. It brings in foreign exchange and is a balance of payment credit, which often offsets a trade balance deficit.
The different types of aid
UN Humanitarian aid
The motivations of developed countries in providing aid
Official Development Assistance (ODA)
Official development assistance is defined as those flows to specific countries and territories (see here for a full list), and to multilateral development institutions which are:
Most ODA is in the form of grants and reaches recipient countries in three ways:
Motives of donor countries in providing ODA:
Strategic and political motives.
Looking at the political and strategic factors that influence aid giving, whether the recipient country was a former colony of the donor is a major factor in determining aid flows. In fact, a country that has a relatively long colonial past receives 87% more aid. UN voting patterns can determine whether 'friends' of the donor countries receive more aid. For example, a country that voted often with Japan (e.g., supporting rights to hunt whales) received more Japanese aid. Here the suggestion is that aid is used to 'buy' political support.
New Zealand and Australia provide much aid to their Pacific Island neighbours such as Papua New Guinea, Samoa and Fiji. This aid is political and increases the diplomatic influence of these countries, provides some political stability in impoverished countries, and the support of expat communities living in the donor countries (e.g., Auckland, New Zealand has the largest Polynesian population in the world).
The economic motives of donor countries play a significant role in donor aid. Aid is often provided to recipient countries that have strong trade and investment links with the donor country.
A report by the Economic Commission for Africa (2004) notes that more than $12 billion of total aid, including emergency assistance, to developing countries was tied to the donor’s exports. This is termed ‘tied aid’.
For example, the US makes sure 80 cents in every dollar of aid is returned to them. Strings attached to US aid projects include the obligation of the recipient country to buy products such as Caterpillar and John Deere tractors, this reduces the value of aid by 25-40%. This obviously shows that much of aid is motivated by strategic interests. However, the Economic Commission for Africa (2004) notes that not all countries are guilty of this, for example, in 2001, over 90% of aid from Denmark, the Netherlands, Norway and the UK was untied. For France, Portugal and Japan, aid and trade are highly correlated.
Moral and humanitarian motives.
In the case of wars, famines and natural disasters aid is obviously provided for moral and humanitarian purposes. It is immoral to see the extent of suffering in war-torn Syria or in towns and villages in Indonesia hit by a tsunami and do nothing about it, so countries will provide aid to help alleviate such suffering.
Aid is provided for longer term development purposes because there is a real concern about the degree of poverty. Adopted in 2000, the Millennium Development Goals are a global commitment to alleviating hunger and malnutrition, disease and premature deaths associated with extreme poverty. Aid funds are tied with progress towards these goals being achieved by the recipient countries.
Aid may be conditional
Tied aid is foreign aid that must be spent in the country providing the aid (the donor country) or in a group of selected countries. A developed country will provide a bilateral loan or grant to a developing country, but mandate that the money be spent on goods or services produced in the selected country.
In 2006 the Organisation for Economic Co-operation and Development (OECD) estimated that less than 50 per cent of Official Development Assistance (ODA) is untied.
Tied aid is only associated with bilateral aid, and not multilateral aid.
Arguments for and against tied aid
The disadvantages of tied aid:
Essentially, tied aid increases the cost of assistance and has the tendency of making donors focus more on the commercial advancement of their countries than what developing countries need. When recipient nations are required to spend aid on products from the donor nation, project costs can be raised by up to 30 percent. Tied aid can create distortions in the market and impede the recipient country's ability to spend the aid they receive. There are growing concerns about the use of tied aid and efforts to analyse the quality of aid given, rather than simply the quantity.
On the other hand, others have argued that tying aid to donor-country products is common sense; it is a strategic use of aid to promote donor country’s business or exports. It is further argued that tied aid if well designed and effectively managed, would not necessarily compromise the quality as well as the effectiveness of aid. However, this argument would hold particularly for programme aid, where aid is tied to a specific projects or policies and where there is little or no commercial interest. It must be emphasised however, that commercial interest and aid effectiveness are two different things and it would be difficult to pursue commercial interest without compromising aid effectiveness. Thus, the idea of maximising development should be separated from the notion of pursuing commercial interest. Tied aid improves donors export performance, creates business for local companies and jobs. It also helps to expose firms, which have not had any international experience on the global market to do so.
Official development ASSISTANCE in mali and bangladesh
Compare and contrast the extent, nature, and sources of ODA to two economically less developed countries – Bangladesh and Mali
Most facts and figures here are taken from statistics provided by the OECD – a group of mostly rich-world countries.
Bangladesh, a south east Asian nation has a population of 163 million. Mali, an east African nation has a population of 18 million. Both countries have a very low per capita GNI – Mali = US$770 and Bangladesh = US$1,130.
Income inequality is extreme in both countries. The Gini-coefficients for both countries are less than 0.34 – among the world’s lowest. In these two countries, a very large proportion of the population earns a very small proportion of national income.
The Human Development Index (HDI) is a summary measure for assessing long-term progress in three basic dimensions of human development: a long and healthy life, access to knowledge and a decent standard of living. The HDI in Bangladesh is 0.579 ranking it just 139th in the world, but higher than Mali which at 0.442 is ranked 175th. Life expectancy, literacy rates and GDP per capita are lower in Mali than in Bangladesh.
Bangladesh receives more in overall ODA than Mali, but Mali receives significantly more on average per person than Bangladesh does. And a far higher proportion of Mali’s ODA is bilateral than multilateral, whereas in Bangladesh the split between bilateral and multilateral aid is more even.
Most of Mali’s aid comes from the US. As a proportion of its top ten donor countries, the US accounts for 31%, providing a total of US$3111 million in aid.
$359 million dollars was provided to Bangladesh by the World Bank’s International Development Association (IDA) – its fund for impoverished countries. In terms of the total ODA from Bangladesh’s top ten donors, 24% comes from the World Bank.
Bangladesh’s ODA is spent largely on infrastructure projects. In line with its government’s aims and objectives, 36 percent of ODA went to economic infrastructure and increased the industrialisation of Bangladesh. For example, the Bangladeshi government invests heavily in its roading network, high speed trains, airports, and other transport networks. As a result, Bangladesh’s shipbuilding industry is continuing its steady growth; and the garment industry now accounts for around 75 per cent of its export revenues. Whereas once Bangladesh was heavily dependent on its primary commodities for export revenues, industrialisation has led to the diversification of its exported goods and services. The programme of industrialisation, financed in large part by ODA has doubled Bangladesh’s per capita GDP since 1975 and decreased its poverty rate by 25 per cent.
When contrasted to Mali, a much smaller proportion of Bangladesh’s ODA is spent on social sectors such as health, yet life expectancy has increased to being nearly 70 years (increasing by five years in the last decade), and the literacy rate has increased to 60 per cent, up from 50 per cent in a decade – fairly rapid progress. This is in contrast to Mali, which spends its ODA differently and has had different outcomes.
In Mali, approximately 40 per cent of its ODA is spent on social sectors such as health, including important water and sanitation projects and programmes. As such, we could expect to see better outcomes for Mali in terms of health and social indicators. Mali has seen an increase in average life expectancy in the same range as Bangladesh’s – 5 years being added in the last decade, but at just 52 years of age, Mali remains one of the worst places in the world for life expectancy. Mali spends relatively little of its ODA on education (13 per cent) and there has been little improvement in literacy rates over the years. Mali’s adult literacy rate stands at 31 per cent, the world’s fourth worst.
The development of economic infrastructure has been a low priority for Mali’s government and the bilateral trade it receives. The development of economic infrastructure accounted for just two per cent of Mali’s ODA spending. Mali remains heavily reliant on producing agricultural and other primary commodities, and industrialisation in the country has made little progress.
Essential statement: Industrialisation increases a country’s rate of economic development and economic growth, reducing the dependency on primary goods, and increasing its HDI score as life expectancy, literacy rates and GDP per capita improve
Aid provided by NGOs
NGOs do not provide concessional loans to the governments of developing countries, but rather grants – financial and/or goods and services.
Despite some shortcomings, NGOs nevertheless have an advantage over governments in many areas of activity. Some of their greatest strengths lies in advocacy and participatory models of development that focus on human development. They can be very effective in demonstrating that poverty, no matter how endemic, can be tackled by involving project beneficiaries in planning, implementation and sustainability of projects. In providing aid, NGOs' have the following advantages:
NGOs provide aid on a small scale, and because NGOs are often relatively small and specialised, different NGOs are involved in a wide range of projects, programmes and activities. These include:
In Africa, many donors view NGOs as an important part of Africa's democratisation process, acting as watchdogs and advocates for human rights and good governance.
NGOs often tackle issues that governments are unable or unwilling to take up. They provide efficient, innovative and cost-effective approaches to difficult social and economic problems. In some cases, they provide leadership in producing and advocating public policy, and operate in spheres where government officials are constrained by bureaucratic or political considerations.
The growing importance of NGOs is reflected in their relationship with the United Nations and its agencies. Virtually every UN agency works with NGOs. The UN High Commissioner for Refugees, for example, has some 400-500 NGO partners and provides hundreds of millions of dollars to NGOs in most countries. The World Bank also has a portfolio of projects approved each fiscal year in which NGOs are involved.
Advantages OF NGOS
Criticisms of NGOs
Evaluating foreign aid
What is aid for?
1. Governments give aid for many reasons. As well as seeking to improve the lives of people in developing countries, they also want to increase the supply of global public goods (such as international law enforcement), project their prestige, promote the security of their citizens, win export contracts, and support their own suppliers. These goals are not mutually exclusive. In the UK the law requires that aid is used to contribute to poverty reduction, but it does not prevent the government from having regard to these other objectives when choosing which people in poverty to help and how.
Here the effectiveness of aid is considered with reference to its impact on people in developing countries, and not with respect to these other possible goals.
2. To understand whether aid is effective it needs to be clear what it is intended to achieve. Aid is often regarded as having two purposes: humanitarian aid, to alleviate suffering usually in an emergency, and development aid to promote economic growth and sustained prosperity.
About 60% of bilateral aid, and 66% of British bilateral aid, is spent on improving services such as education, health, water and sanitation. This aid is not a temporary humanitarian response to an emergency, but a long-term contribution to the provision of key services and an investment in the institutions needed to provide them in the future. This aid may possibly strengthen economic performance in the long run, but it is not likely to lead to faster economic growth in the short or medium term. The purpose of most aid is to improve the living standards of the citizens of developing countries by contributing to key services.
3. It is attractive to think that aid can accelerate sustainable economic growth and so do itself out of a job ‘. But providing basic services to people who need them is also a legitimate goal, irrespective of whether doing so accelerates economic growth. There is a sound economic case for increasing total welfare by a modest programme of redistribution which gives very poor people access to essential services.
4. The effectiveness of aid can therefore be judged by the extent to which it brings about one or more of the following objectives, to which different people may attach different weights:
Does aid lead to economic growth?
5. Economists have applied increasingly sophisticated econometric techniques to try to establish whether aid leads to economic growth. In the 1980s, some studies found a positive and significant effect of aid on growth, while others found no effect at all.
These finding triggered a further wave of studies that sought to either disentangle or refute the results. Some scholars argued that aid does lead to growth in some circumstances—such as where there are good policies or export shocks, or where institutional quality is high. Other studies argued that aid works on average, but with diminishing returns.
Recent studies continue both to challenge and to support the hypothesis that aid leads to growth. One study by researchers at the Centre for Global Development found a strong, positive effect of a subset of aid on economic growth, with diminishing returns.
An influential study by IMF researchers found no evidence of an effect under a number of model specifications.
6. The most compelling conclusion is that it is inherently difficult to use cross-country regressions to assess the impact of aid on growth. The sample size is too small (about 80 countries) and there are numerous possible determinants of growth, many of which are highly correlated with each other and so difficult to distinguish statistically. Furthermore, levels of income are an important determinant of aid volumes (donors give more aid to poor countries) so it is difficult to use statistical tools to distinguish the effects of aid on growth from the effects of growth on aid.
The statistical difficulties of establishing a clear relationship between aid and growth should not be interpreted as evidence that no such relationship exists. Given the modest volumes of aid, we should not expect an impact on growth which is bright enough to shine through the statistical fog. The safest conclusion is that cross country growth regressions do not have sufficient statistical power to tell us whether aid leads to growth, still less to answer the more important question of which kinds of aid are effective and which are not.
Nor does the inconclusive evidence on the effects of aid on growth mean that donor countries are powerless to promote sustainable economic growth in developing countries. Industrialized nations have many other policy choices which are at least as important as giving aid. These include action on trade policy, climate change, immigration, conflict resolution, arms sales, corruption, research and development, technology transfer, illicit financial flows and international tax cooperation.
Does aid improve living standards in developing countries?
7. There is extensive evidence to show that significant aid does reach intended beneficiaries and provides them with key services. The quality of life in developing countries has improved appreciably over the last fifty years, even in countries where incomes have stagnated or fallen back, and aid has contributed significantly to these gains.
For example, about 80% of the world’s children now get basic vaccinations, saving about 3 million lives a year, and over half of vaccinations in low-income countries are financed by foreign aid.
The UK Department for International Development estimates that each year British aid pays for 11 million children to go to school – more children than the UK government educates at home but at 2.5% of the cost.
Advances in rigorous impact evaluation have enabled us to measure more precisely the difference made by specific kinds of intervention. For example, a project in Kenya to provide deworming drugs reduced pupil absenteeism by a quarter and proved far cheaper than alternative ways of boosting school participation. Evaluations like this enables the identification of the effects of individual programmes, financed partly or wholly by aid.
But one cannot say for certain whether the existence and extent of each programme was entirely due to aid, nor can one say with certainty whether offsetting or complementary choices were made as a result of aid. Aid is fungible, whether provided as projects or financial assistance.
Nonetheless, with at least the degree of rigour with which we assess the impact of domestic spending, one can make a clear link between aid and quantified and significant improvements in the well-being of people in developing countries.
Unintended consequences of aid and limits to absorptive capacity
8. Large-scale foreign assistance may also have wider impacts which are detrimental to long-term development. The possible aggregate effects include undermining the development of domestic institutions, eroding the accountability of the government, entrenching interest groups that present obstacles to development, and driving up the real exchange rate and so making the export sector uncompetitive. There are documented examples of all these possible consequences of aid but not enough evidence to determine whether they are sufficiently common and significant to outweigh the benefits of aid. If these effects are disproportionately worse at high levels of aid, then there may be diminishing marginal returns from aid, and this could imply a limit on the amount of aid that developing countries can absorb before it starts to do more harm than good.
9. In principle donors should be able to limit, and perhaps eliminate, these unintended but foreseeable consequences of aid by improving the way they manage aid. The internationally-agreed agenda for better aid effectiveness sets out some necessary steps.
For example, donors could help countries to manage the macroeconomic effects of aid by making aid much more predictable and less volatile. They could avoid undermining institutions by channelling aid through government systems instead of separate project implementation units. They could limit their effect on domestic accountability by making aid significantly more transparent and eschewing externally imposed policy conditions. In practice, however, progress has been glacial, because donors face domestic political constraints which limit their ability to make the necessary improvements.
Focus aid on its comparative advantage
10. Aid constitutes only a small proportion of the resources available to developing countries, although it contributes a significant proportion of external resources in sub-Saharan Africa.
Other financial flows such as domestic revenues, private investment and remittances are unlikely to benefit disadvantaged groups as much as they do more powerful groups in society. This may entrench existing inequality and marginalisation. These sources of funding are also likely to underinvest in the supply of global public goods. By contrast, aid can be used to reach women and girls and the poorest communities, and to increase the provision of global public goods. The greatest value from aid may be obtained by systematically targeting it on objectives to which it makes a distinctive contribution and which other sources of finance are unlikely to reach.
11. Economic growth and private investment are key drivers of development and poverty reduction, but it does not follow that they should be high priorities for aid. There are other sources of finance for investments likely to support these goals. Donors wanting to give more priority to growth can also look to their ‘beyond aid’ policies such as trade and technology transfer.
The roles of aid and trade in development
Logic of ‘Trade not Aid’:
“There is extensive evidence that the promotion of markets in healthcare leads to an increase in health inequities and inefficiencies.” Global Justice report on Gates Foundation, 2016.
Official DEVELOPMENT assistance
Trade, not aid
How to Implement ‘Trade not Aid’
Reduce trade protectionism. Supporters of ‘trade not aid’, would seek to remove any tariff barriers or obstacles to free trade and opening up markets to competition Supporters of free trade usually support free market reforms to reduce the role of government interference and allow market forces to encourage innovation, efficiency and increased economic output. Policies to support free trade may involve:
Criticisms of ‘Trade not Aid’:
Aid for trade. Aid may be necessary to deal with global inequality and enable the poorer developing economies to fully benefit from the potential of trade. For example, aid can help improve infrastructure and transport links. In this case, aid for trade should be motivated by the imperative to create effective market access by removing internal barriers to trade. The aid for trade agenda reflects the realisation that, for developing countries, the necessary investments are particularly large, and the capacity to meet them is particularly small. There is an emerging consensus that the current WTO Doha Round will require adequate trade related assistance to mitigate the detrimental effects of trade reforms, and to enhance the trading capacity of developing countries.
Infant industry argument. Developing countries may not be able to benefit from free trade. For example, their comparative advantage may lie in primary products which are subject to fluctuating commodity prices. The infant industry argument suggests that developing countries may benefit from temporary tariff barriers as the new industry develops. Not all countries are the same. Several south-east Asian economies have benefitted from growth of trade (though it was not without protectionist measures) but this doesn’t mean the same model can be transferred to landlocked economies in Sub-Saharan Africa.
Aid can help overcome capital shortages and crippling debt payments. A model of growth suggests that increasing capital is an effective way of increasing the rate of economic growth. For developing economies stuck in a cycle of low growth and low savings, aid can help break the negative cycle.
Benefits of free trade are not always equitably distributed. Aid can enable assistance to areas of the economy that have missed out. For example, retraining for those who are geographically or occupationally immobile. Market failure can lead to an under provision of important infrastructure such as education and infrastructure. Aid can help overcome these areas of market failure and help the economy to grow at a faster rate.
Aid needed in emergencies. At various times, international aid has helped to rebuild countries and regions recovering from shock. For example, the Marshall Plan for Western Europe – post-Second World War. Foreign aid to help with humanitarian crisis.
Trade vs Aid conclusion
Both aid and free trade have the capacity to improve economic welfare. It is not so much trade vs aid – but what quality and type of aid is given. Does it complement government efforts to extend public support? Does it help overcome market failure and improve access to global trade markets. Free trade can also play a role, that aid cannot match. Trade and economic development are ultimately the goal as they enable countries to be self-sufficient. But, thoughtful aid can accelerate this process.
MULTILATERAL development assistance
Multilateral Development Assistance: Examining the current roles of the IMF and the World Bank in promoting economic development.
Large-scale organisations also work in the field of development by providing development assistance, either through the provision of grants, or through concessional loans i.e. those with less stringent interest rates or repayment times than would be required in the case of commercial loans.
Many of these organisations come under the umbrella of the UN and emerged as part of the discussions held towards the end of the Second World War. Amongst the largest are the:
International Monetary Fund
The International Monetary Fund (IMF) is an international organisation of 189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
The IMF was established to:
It can be safely said that the IMF has had a complicated role in economic development.
Criticisms of the IMF in development include the following:
Conditions for loans. The IMF makes the loan given to countries conditional on the implementation of certain economic policies, which typically include the following:
Exchange rate reforms. When the IMF intervened in Kenya in the 1990s, they made the Central bank remove controls over flows of capital. The consensus was that this decision made it easier for corrupt politicians to transfer money out of the economy (known as the Goldman scandal). Critics argue this is another example of how the IMF failed to understand the dynamics of the country that they were dealing with, insisting on blanket reforms.
Devaluations. In the initial stages, the IMF has been criticised for allowing inflationary devaluations.
Free-market criticisms of the IMF. Believers in free markets argue that it is better to let capital markets operate without attempts at intervention. They argue attempts to influence exchange rates only make things worse – it is better to allow currencies to reach their market level. They also assert that bailing out countries with large debts is morally hazardous; countries that know that there is always a bailout provision will borrow and spend more recklessly.
Lack of transparency and involvement. The IMF has been criticised for imposing policy with little or no consultation with affected countries.
Supporting military dictatorships. The IMF has been criticised over the decades for supporting military dictatorships.
The IMF does have the following strengths which enable it to play a strong and influential role in economic development:
Flexibility and speed. In March 2009, in the wake of the global financial crisis, the IMF created the Flexible Credit Line (FCL), which is a fast-disbursing loan facility with low conditionality aimed at reassuring investors by injecting liquidity into economies. Traditionally, IMF loan programs required the imposition of austerity measures such as raising interest rates that can reduce foreign investment. In the case of the FCL, countries qualify for it not on the basis of their promises, but on the basis of their history. Just as individual borrowers with good credit histories are eligible for loans at lower interest rates than their risky counterparts, similarly, countries with sound macroeconomic fundamentals are eligible for drawings under the FCL.
In terms of economic development in developing countries, a similar program has been proposed for low-income countries. Known as the Rapid Credit Facility, it is front-loaded (allowing for a single, up-front pay-out as with the FCL) and is also intended to have low conditions attached.
Cheerleading. The Fund is positioning itself to be less of an adversary and more of a cheerleader to IMF countries. For some countries that need loans more for reassurance than reform, these changes to the Fund toolkit are welcome. This enables more domestic political and economic stability, which benefits economic development.
Adaptability. Instead of providing the same medicine to all countries regardless of their problems, the new loan facilities are intended to aid reform-minded governments by providing short-term resources to reassure investors. In this manner, they help politicians in developing countries manage the downside costs of integration
Transparency. The IMF has made efforts to improve its own transparency and continues to encourage its member countries to do so. Supporters note that this creates a barrier to any one or more countries that have more geopolitical influence in the organisation. In reality, the major economies continue to exert influence on policy and implementation.
IMF Financial operations
Why the IMF lends
The World Bank
The World Bank is an international financial institution that provides loans to countries of the world for capital programs. The World Bank's stated goal is the reduction of poverty. However, according to its Articles of Agreement, all its decisions must be guided by a commitment to the promotion of foreign investment and international trade and to the facilitation of capital investment.
The World Bank's role was concerned with financing reconstruction and development through the construction of national infrastructure such as roads and dams. By supporting projects through funding, and providing technical assistance, the World Bank considered that it would bring about increases in productivity, output and incomes and self-sustaining economic growth.
The "World Bank" is the name that has come to be used for the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). Together these organisations provide low-interest loans, interest-free credit, and grants to developing countries as follows:
The International Bank for Reconstruction and Development (IBRD). This IBRD lends money at commercial interest rates to governments or private firms, guaranteed by their governments.
The International Development Association (IDA). The IDA lends money, called credits, to the poorest countries on concessionary terms i.e. the repayment periods are longer than the IBRD's loans and the loans are interest free. These are called 'soft loans'.
In addition, the International Finance Corporation (IFC) is closely affiliated to the World Bank. It was started up to enable funds to be lent to, or used to purchase shares in, private firms engaged in activities that would lead to development, but not needing a government guarantee.
Up until the 1970s, much World Bank lending was targeted at projects primarily concerned with building energy and transportation infrastructure in developing economies. Its early history had been concerned with similar projects in reconstructing war torn Europe. The poor economic performance and continued lack of development of many of the countries that had received World Bank assistance resulted in a rethink of the approach of the IBRD and the IDA. The new approach involved identifying specific needs of regions within developing countries, and invariably this meant targeting smaller scale development projects, often of a very diversified nature.
Many of these were concerned with funding agricultural projects, and usually those that stimulated the growth of cash crops. The intention was that such support would raise the incomes of smaller scale farmers and encourage food production. Projects aimed at the tourist industry, education, water supply and health care have also been supported.
Since the 1980s many World Bank loans have, like the IMF, been tied to certain strict conditions laid down in structural adjustment programmes.
The World Bank is more focussed on economic development than the IMF, which is more focussed on stabilising economies.
The current primary focus of the World Bank centres on six strategic themes:
There have been issues with the World Bank.
The bank’s lending policies often reward macroeconomic inefficiency in the underdeveloped world, allowing inefficient nations to avoid the types of fundamental reforms that would in the long run end poverty in their countries.
Many analysts note that the best example is to compare the fantastic growth in East Asia to the deplorable economic conditions of Africa. In 1950 the regions were alike – South Korea had a lower per capita GDP than Nigeria. But by pursuing macroeconomic reforms, high savings, investing in education and basic social services, and opening their economies to the global trading order, the “Pacific Tigers” have been able to lift themselves out of poverty and into wealth with very little help from the World Bank. Many countries in Africa, however, have relied primarily on multilateral assistance from organisations like the World Bank while avoiding fundamental macroeconomic reforms, with deplorable but predictable results.
Conservatives point out that the World Bank has lent more than $350 billion over a half-century, mostly to the underdeveloped world, with little to show for it.
The World Bank has also been accused of focusing on large projects rather than local initiatives. Some critics claim that World Bank loans give preference to “large infrastructure projects like building dams and electric plants over projects that would benefit the poor, such as education and basic health care.
The projects often destroy the local environment, including forests, rivers, and fisheries. Some estimates suggest that more than two and a half million people have been displaced by projects made possible through World Bank loans.
Take the following examples. First, the Sardar Sarovar dam on the Narmada River in India was expected to displace almost a quarter of a million people into squalid resettlement sites. Second, the Polonoroeste Frontier Development scheme has led to large-scale deforestation in the Brazilian rain forest. Third, in Thailand, the Pak Mun dam has destroyed the fisheries of the Mun River, impoverishing thousands who had made their living fishing and forever altering the diet of the region.
In terms of development, the World Bank has increased its transparency and its actions and decision-making are open to more scrutiny than ever. Additionally, the World Bank has specific strengths in assisting with economic development, including:
1. Expanding social issues in the fight on poverty. For example, in 2001, the World Bank began to incorporate gender issues into its policy.
2. Improvements in countries’ competitiveness and increasing exports. The World Bank’s policies and its role as a donor have helped improve the ability of some countries to secure more of the global revenues for basic commodities. In Rwanda, for example, reforms transformed the country’s coffee industry and increased exports. Kenya has expanded its exports of cut flowers, and Uganda has improved its fish-processing industry. World Bank efforts have also helped African financial companies develop.
3. Improving efficiencies in diverse industries and leveraging the private sector. The World Bank has worked closely with businesses in the private sector to develop local infrastructure, including power, transportation, telecommunications, health care, and education.
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