University of Papua New Guinea International Economics Lecture 18: International Aid

University of Papua New Guinea

International Economics

Lecture 18: International Aid

The University of Papua New GuineaSlide 2

Lecture 18: International Aid Michael Cornish

Overview

• Definitions

• The 0.7% goal

• Trends in aid

• The relative importance of aid flows

• The role of aid

• Is aid a good thing?

• How can we improve aid?



Definitions

• International aid / international development

• ODA

– Provided by official agencies (read: governments)

– Promotion of economic development and welfare

of developing countries as its main aim

– Is concessional in character

• Non-official development assistance

• Bilateralism / multilateralism



The 0.7% goal

• Pearson Commission (1969), adopted in 1970 by UN:

– “Each economically advanced country will progressively its

ODA to the developing countries and will exert its best efforts

to reach a minimum net amount of 0.7% of its GDP by the

middle of the decade”

• Was based on a financing gap model

• Is it relevant?

• Very few governments have reached this level

• Australia? 0.5% by 2015 (but we’ll see…)



Trends in International Aid

Source: OECD DAC Development Cooperation Report 2010



Australia’s aid program

Source: Aust. budget documents



0

100

200

300

400

500

600

1970 1975 1980 1985 1990 1995 2000 2005

0

1000

2000

3000

4000

5000

6000

FDI (lhs)

Aid (lhs)

Exports (rhs)

The relative importance of aidAid, exports and FDI for developing

countries (current USD billion)





Aid to low, lower middle and upper middle income countries (% GDP)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

1960 1970 1980 1990 2000 2010

Low income Lower middle income Upper middle income



1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Aid to sub-Saharan Africa (% GDP)



Aid as a % of GDP for SS-African countries (2007)

Libe

ria

Burun

di

Gui

nea-

Bissa

u

Sier

ra Leo

ne

Sao

Tom

e an

d Pr

incipe

Moz

ambi

que

Rwan

da

Mal

awi

Tanz

ania

Mal

i

Ugand

a

Mau

ritan

ia

Burkina

Fas

o

Congo

, Dem

. Rep

.

Niger

Ethi

opia

Mad

agas

car

Cape

Verde

Eritr

ea

Gam

bia,

The

Central

African

Rep

ublic

Comor

os

Camer

oon

Zambi

a

Benin

Leso

tho

Gha

na

Sene

gal

Keny

a

Chad

Gui

neaTo

go

Suda

n

Namib

ia

Swaz

iland

Congo

, Rep

.

Niger

ia

Mau

ritiu

s

Botsw

ana

Cote

d'Iv

oire

Gab

on

Angol

a

Seyc

helle

s

Equa

toria

l Gui

nea

Sout

h Afr

ica

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%94.7%

Note the huge variation; 21 countries with aid > 10% GDP



1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Aid to South Asia (% GDP)



1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

Aid to East Asia (% GDP)



1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

Aid to Latin America (% GDP)



Aid to Middle East and North Africa (% GDP)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1960 1970 1980 1990 2000 2010



-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Tim

or-

Lest

e

Solo

mo

n I

slan

ds

Mic

ron

esi

a, F

ed

. St

s.

Mar

shal

l Is

lan

ds

Kir

ibati

Pal

au

Van

uat

u

Ton

ga

Lao

PD

R

Cam

bo

dia

Mo

ngo

lia

Pap

ua

Ne

w G

uin

ea

Vie

tnam Fiji

Ph

ilip

pin

es

Ind

on

esi

a

Mal

aysi

a

Ch

ina

Thai

lan

d

Aid as a % of GDP for Pacific / some East Asian countries (2007)



The role of aid

• Innovation and ideas

– Is this all good?

• Stabilisation

• Emergency and food aid

• For security and geopolitical reasons

• Economic growth?

• Poverty reduction?



Is aid a good thing?

Four broad perspectives:

1. Very good, very important

– Jeffery Sachs [Book: The End of Poverty]

– The ‘poverty trap’

– Complementary and simultaneous

investments




2. Very bad (and thus very important in a bad way!)

– Peter Bauer [Book: Dissent on Development]

– Corrosive influence

– Dependency

– Politicisation of developing country economy

– Central planning

– Rent-seeking




3. Marginally good, but not too important

– Policies and institutions are most important

– …but aid can help at the margins

4. Marginally bad, but not too important

• Bill Easterly [Book: White Man’s Burden]

• Planners v. searchers




The verdict?

• Evidence mixed…

• Lack of counterfactual

• Econometric studies

• Poverty reduction

• The equity argument

…and perhaps the better question is:



How can we improve aid?

• My preferred approach – consider these three

elements:

– Recipient

– Donor

– The relationship between the two




Recipient:

• Governance-centric

– Conditionality

• Domestic influences / political support

– Technical assistance

• But is there commitment to reform?




Donor:

• Knowledge burden

• Development is complex (in case you hadn’t

worked it out by now!)

• Doing a lot of ‘a little’

• Problems getting data

• Lack of feedback loops




The relationship:

• One recipient, but many donors

• Heavy transaction costs

• Harmonisation

• Alignment

Documents

University of Papua New Guinea International Economics Lecture 18: International Aid