Unit 4 Macro: Overseas Aid and Economic Development - Basic Background

What role can and what role should overseas aid play in promoting and sustaining economic development? These are hugely contentious questions in the subject. Estimates vary from those which suggest that overseas development aid has added about 0.5 per annum to growth in recipient countries to those which suggest that it has had no positive, or indeed negative, effect on growth.

Backgrounds statistics on aid

• In 2011, overseas aid payments were $133.5 billion, equivalent to 0.31 per cent of developed countries’ combined national income
  
• In 2010, global military expenditure = $1630 billion versus $128 billion on development aid
  
• The value of trade outweighs aid by a large multiple. The export earnings of all developing countries in 2010 were more than 40 times the level of official aid flows.
  
• Denmark, Luxembourg, the Netherlands, Norway and Sweden exceed the United Nations ODA target of 0.7 per cent of gross national income (GNI)
  
• The largest aid donors are the United States, Germany, the United Kingdom, France and Japan
  
• Korea, China and India now also donor nations
  
• The main destinations of aid from advanced rich nations in 2010 were Sub-Saharan Africa (44%), which also received more aid per head than other regions, followed by South and Central Asia (19.5%) and Middle East and North Africa (10%)
  
• In 2010, total UK aid amounted to $13.1 billion
  

Types of Aid

1. Bi-lateral aid: Aid given out on a country-to-country basis e.g. from the UK to Kenya
   
2. Multi-lateral aid: Aid channelled through international bodies
   
3. Project aid: Direct financing of specific projects for a donor country
   
4. Technical assistance: Funding of expertise of various types
   
5. Humanitarian aid: Emergency disaster relief, food aid, refugee relief and disaster preparedness - Humanitarian aid accounts for less than 10% of global aid flows
   
6. Soft loans: A loan made to a country on a concessionary basis with a lower rate of interest- for example, India has received over $2 billion in low-interest funds from the World Bank for many of its welfare schemes, these soft loans are set to stop as India heads towards middle-income status
   
7. Tied aid: i.e. projects tied to suppliers in the donor country - the UK abandoned tied aid in 1997
   
8. Debt relief – this may take the form of cancellation, rescheduling, refinancing or re-organisation of a country’s external debts
   

Although aid is important for many poorer nations, exports from developing countries are now more than 40 times the level of official aid flows. Remittances for migrants are about three times as large as aid flows. Private capital inflows are 10 times aid flows. The latest available data for aid and private capital flows heading to developing countries is shown in the table below.