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it discusses the politics of alternative development. - Aid and Development - International Trade and Economic Development - Gender and Development - Regional Integration and economic benefits it gives justification for alternative development strategies and discusses their origin.
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Chapter III The Politics of alternative Development;
Origin and Moral justificationsTopics of discussion:
Aid and Development
International Trade and Economic Development
Gender and Development
Regional Integrations and economic benefits
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OUTLINE: Definitions, motivations, trends Aid effectiveness
Theory and evidence Macroeconomic dangers of aid
Dutch diseaseAid volatility
Policy options in managing aid flowsPreparing for scaling up aidMonetary policy optionsFiscal challenges and debt sustainabilityStrengthening governance
Conclusions and guidelines
DefinitionDevelopment aid
Unrequited transfers from donor to country designed to promote the economic and social development of the recipient (excluding commercial deals and military aid)
Concessional loans and grants included, by tradition (Grant element ≥ 25%) Development aid can be
Public or private Bilateral (from one country to another) or multilateral (from international organizations) Program, project, technical assistance Linked to purchase of goods and services from donor country, or in kind Conditional in nature (IMF conditionality, good governance)
Moral duty, Neocolonialism, Humanitarian intervention, Public good
National (Like education and health care) International (Social justice to promote world unity, UN aid commitment of 0.7% of
GDP) World-wide redistribution (Increased inequality word-wide, Marshall Plan after
World War II, 1.5% of US GDP for four years vs. 0.2% today)
Motivation: Why aid?
Who are the donors? United States: largest donor in volume, but low in relation to GDP 2% of GDP Japan: second-largest donor in volume Nordic countries, Netherlands Major donors to multilateral programs Only countries whose assistance accounts for 0.7% of GDP EU: leading multilateral donor Others; IMF, WB, USAID, CIDA, NGOs
A recovery in sight? The Blair Report Blair Report and the Sachs ReportSachs Report called on world community to
increase development aid (particularly for Africa) to enable developing countries to attain the MDGs by 2015 2005 G-8 Gleneagles communiqué called for raising annual aid flows to Africa by
$25 billion per year by 2010 2005 UN Millennium Project called for $33 billion per year in additional resources
For comparison, US gave $20 billion in 2004, not $70 billion as suggested by UN goal
Aid fills gap between investment needs and saving and increases growthPoor countries often have low savings and low export receipts and
limited investment capacity and slow growthAid is intended to free developing nations from poverty traps
Example: Capital stock declines if saving does not keep up with depreciation
Macroeconomics of Aid
Empirical Studies of AidRegression analysis to measure the impact of aid on
Saving, Investment, Public finance AND Economic growth
Saving Negative effect on saving
Substitution effect? Positive effect for good performers E.g., South-East Asia, Botswana
Investment No impact on private investment Positive impact for good performers
Public finance Uncertain effect on public investment Positive effect on public consumption
Growth: Mixed results Most early studies showed no statistically significant impact Some more recent studies show negative impact Bias and endogeneity issues
Need to distinguish between different types of aid (Leakages, cash vs. aid in kind)
Does aid work? Domestic responses
Does aid work? The current debate Examples of recent studies
Rajan and Subramanian (2005) No robust relationship between aid and growth
Burnside and Dollar (2001) Aid works in “countries with good policies”
Clemens, Radelet, and Bhavnani (2005) Aid works if measured correctly Distinction between fast impact aid (infrastructure projects) and slow impact aid
(education); Financial vs. social returnsAid leads to corruption, Aid tends to be misused Svenson (2000) & Murshed and Sen (1995)Aid is badly distributed, sometimes for strategic reasons Alesina and Dollar (2000) & Collier and Dollar (2002)
Aid increases public consumption, not investmentAid is procyclical (when it rains, it pours)Aid leads to “Dutch disease” - Labor intensive and export industries contract relative to
other industries in countries receiving high aid inflowsGrowth is perhaps not the best yardstick for the usefulness of aid
NB; DUTCH DISEASE: - the Appreciation of currency in real terms, either through inflation or nominal
appreciation, leads to a loss of export competitiveness)
Aid Volatility and UnpredictabilityAid is volatile and unpredictable
Aid flows are 6-40 times more volatile than fiscal revenueVolatility is largest for aid dependent countries (Bulir and Hamann, 2005)Volatility increased in the 1990sAid delivery falls short of pledges by over 40%
Reasons Donors: Changes in priorities; administrative and budgetary delaysRecipients: Failure to satisfy conditions
Consequences of Aid VolatilityImpact of large sudden inflows
Supply constraints in absorbing aid Real exchange rate overshooting and volatility Negative impact on export industries Ratcheting up spending commitments without adequate consideration of exit strategy Infrastructure investment without adequate planning for recurrent expenditure
Impact of aid promised, but not disbursed Spending commitments cannot be financed Volatility in money supply, inflation, and exchange rates
Monetary and Fiscal Policy Options to mitigate AID volatilityMonetary Policy OptionsDomestic sterilizationSale of domestic bond instruments, Reserve requirements, Central government deposits
Sale of foreign exchangeObjectives and economic impact of policiesNominal exchange rate vs. inflation, Domestic interest rates
Fiscal Policy OptionsSave resourcesUse aid to purchase imported goodsSpend on non-traded sectors with few supply constraints
Other spending optionsSpend on nontradables with supply constraints
Infrastructure spending for future growth
Social spending for poverty reduction
Promoting Growth and Reducing PovertyBalancing growth and poverty reduction (Growth effects from infrastructure investment
and Targeting spending to the poor) Improving coordination among
NGO activities, Sub national government activities, Private sector capacity
Developing an Exit Strategy Preventing aid dependency Protecting revenues
Composition, Corruption and Tax treatment of aid The scaling down of aid Private economic activity Real spending and recurrent spending
Strengthening Governance Corruption and economic performance
Anticorruption strategies (Reduce state role, Improve regulatory environment, Punish offenders and
Liberalize and reform institutions)
Improving public expenditure management systems
Summary and GuidelinesFrom aid fatigue to new initiativesAid effectiveness is ambiguous
Positive results likely with better policies and governance
Five Primary GuidelinesMinimize risks of Dutch diseaseEnhance growthPromote good governance and reduce
corruptionPrepare an exit strategyAssess the policy mix
International Trade and Economic Development
Outline:The relationship between international trade and
economic developmentTerms of trade (different types) and their effects on
economic developmentThe exports instability in developing countries the trade policies and the main problems from the
developing countries
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The Importance of Trade to Development
Traditional trade theory & economic development: - comparative advantage , traditional trade theory , fixed
pattern of development;Traditional trade theory incorporated with changes in
factor supplies, technology, and tastes: the development pattern could be changed;
The trade theory of comparative statics: shows relevance for developing nations and developing process.
International trade functioned as an engine in 19th century: UK;U.S.; Canada; New Zealand; Australia; Argentina, Uruguay, and South Africa
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The contributions of trade to developmentTrade can lead to the full utilization of underemployed domestic resources;
Trade makes possible division of labor and economies of scale (such as Taiwan, HK,
Singapore);
International trade is the vehicle for the transmission of new ideas, technology,
managerial and other skills;
Trade also stimulates and facilitates the international flow of capital from
developed to developing countries;
The importation of new manufactured products has stimulated domestic demand
until efficient domestic production of these goods become feasible (Brazil,India);
International trade is an excellent anti-monopoly weapon because it stimulates
greater efficiency by domestic producers to meet foreign competition.
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International trade and endogenous growth theoryRomer(1986) and Lucas(1988): positive relationship between trade and long-run
economic growth and development;New theory of endogenous growth: lowering the trade barriers will speed up the
economic growth and development in the long-run.
----------------The Terms of Trade and Economic Development1. 1. The commodity, or net barter, terms of trade (N) : It is the ratio of the price index of the nation's exports (Px to the price index of its imports (Pm) multiplied by 100 (to express the terms of trade in percentages). i.e.: N= (Px/Pm)100 2. Income terms of trade (I) : They are given by: I= (Px/Pm) Qx 3. Single factoral terms of trade (S): They are given by: S = (Px/PM) Zx4. Double factoral terms of trade (D), They are given by: D = (Px/Pm)(Zx/Zm) 100 *Among the 4 defined terms of trade, N,I,S are the most important , especially for
developing countries
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Alleged reasons for deterioration in commodity terms of trade in developing countriesMost or all of the productivity increases that take place in developed
countries are passed on to their workers in forms of higher wages and income, while most or all the productivity increases that take place in developing nations are reflected in lower prices;
The demand for the manufactured exports of developed nations tends to grows much faster than the demand for the agricultural and raw materials exports from developing nations
Export Instability and Economic DevelopmentCause and effects of instability: wild fluctuation in prices of the
primary exports is due to both inelastic and unstable demand and supply.
The empirical study shows that export instability was not very large and that has not hampered development.
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Import Substitution versus Export Orientation: trade policy of developing countries
Import substitution industrialization (ISI): the substitution of imports by domestic production
Export-oriented industrialization (EOI): based on comparative advantage
Empirical evidences show that EOI has better effects than ISI: HK and Singapore versus India and Pakistan
(Recent trade liberalization and growth in developing countries)
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3.3. Gender and Development
Definition of GenderChanging thinking and practice on women, gender and
development‘WID’, ‘WAD’ and ‘GAD’
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Gender is a social construct In contrast to sex, which refers to biological differences between males and females,
gender is a social or cultural construct of the differences between women and men. People are born female or male, but they acquire a gender identity that shapes socially
acceptable activities for women and men, their relations, and their relative power.
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Theory and Policy; WID WAD & GAD “Women in Development” (WID) - Rooted in modernisation theory and liberal feminist ideas on equality- Economic change = empowerment- Rise of micro-credit policies and the recognition of women in productive economy
“Women and Development”- Rooted in dependency theory and Marxist feminist ideas- Economic change = empowerment- Advocated no real policy change around involving women in the development process
“Gender and Development”- Rooted in post-development theory and post-structuralist critiques in feminism- Economic change ≠ empowerment (e.g. micro credit)- Refocus on ‘gender relations and roles’ above ‘women’ as a categoryGender ≠ women- Effective poverty reduction is gender aware
Economic growth and gender equalityIncome growth promotes gender equality in the long run by increasing
women’s education, investment in girls human development and for women to participate in the labor force.Ghana, India, Malaysia, Pakistan, Peru, Tanzania, Turkey and Vietnam
More investment in rural infrastructure like water, transportation and fuel eases the burden of femalesNepal and Pakistan- water and energy infrastructureMorocco- pipes water increases girls school attendance
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Three-part strategyReforming institutionsImplementing policies for sustained economic growth and
developmentTaking active measures to improve women’s command of
resources and political voiceConclusionAfter three decades of Women in Development and
Gender and Development policies the work of redressing gender inequalities has only just begun
Investing in women will not put an end to poverty but it will make a critical contribution to improving household well-being
Furthermore, it will help to create the basis for future generations to make better use of both resource and opportunities
3.4 Regional Integration and BenefitsOutlines:What is Regional Integration (RI)?Stages of Economic IntegrationKey Principles for Successful RIBenefits of RIConclusion
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Regional Integration- It remove barriers and increase the movement of people, labor, goods, capital among nation- Reducing possibility of regional armed conflict- Adopting cohesive regional stances on policy issues Integrated economies:
EU, NAFTA, ASEAN, MERCOSUR.
Stages of Economic Integration1. Free-Trade Area
All barriers to trade of goods/services are removed Each country allowed to determine non-member policy
2. Customs Union Eliminates trade barriers between member countries Adopts common external trade policy
3. Common Market No barriers to trade among member countries Common external trade policy Allows factors of production to mover freely among members
4. Economic Union Free flow of products & factors of production Adoption of common external trade policy Requires common currency, common monetary & fiscal policy
5. Political Union
Central political apparatus coordinates economic, social & foreign policy of members 23
Key Principles for Successful RIOpenness: openness to the rest of the world is essential
Subsidiarity: Regional organization should do only what national governments cannot do as well
Private sector leadership: private sector is the engine of integration
Pragmatism: Variable geometry (countries join when they are ready and appropriate); variable speed (not all issues simultaneously); variable depth (degree of supranationality)
Benefits of Regional IntegrationTrade Creation: Increase in the level of trade between nations that results from
regional integration.
Greater Consensus: Eliminate trade barriers in smaller groups of countries is that easier get consensus.
Political Cooperation: Some countries have greater political weight, so they can more negotiate with other countries. And can reduce military conflict.
Employment Opportunities: Regional Integration can expand employment opportunities by enabling people to move from one country to another to find work.
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ConclusionBecause of the benefits of Regional
Integration are greater than the costs, regional integrations acceptable for countries.
RI Expands trade among nations Reduces unemployment Military conflict among nations declines Flows of FDI increase among countries
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