Foreign Aid

Dr. George NortonAgricultural and

Applied EconomicsVirginia Tech

Copyright 2009

AAEC 3204AAEC 3204

Objectives

• Examine nature of Aid flows to developing countries, including the rationale for Aid and the types of assistance to agriculture

• Discuss the types, objectives, and, effects of food aid programs

What is foreign aid?

What are the major types of foreign development assistance?• Financial aid• Technical assistance• Food aid

Includes grants and loans with at least a 25% grant element are defined as Official Development Assistance

Nature of foreign aid to agriculture

• Financial, technical, food

• Projects and programs

• Grants and concessional loans

• Official flows and non-government aid

Examples: agr. research and extension projects, irrigation and flood control projects, agr. policy assistance, agr. education and training, direct budgetary support, flood aid.

What Percent of the Federal Budget Goes to Foreign Aid?

Foreign Aid 2007 (non-military) = $24 billion

Federal Budget 2007 = $2.4 trillion

Therefore Aid = 1% of Federal Budget

Gross Domestic Product (GDP) = $14 trillion

Therefore Aid = .17% of GDP

What is the rationale for foreign development assistance?

Rationale for aid

Humanitarian (moral or ethical responsibility to help the poor)

Political (strategic self interest)

Economic (develop markets)

Rationale for foreign aid

1. Humanitarian (moral or ethical)a. Compensation for past injusticesb. Uneven distribution of global natural resourcesc. Moral obligation to help the poor improve their nutritional

status and standard of living

2. Political (strategic self interest) (buy friends) (security assistance)

3. Economic self-interesta. Develop markets for developed country’s goodsb. Dispose of surpluses

U.S. Official Development Assistance (ODA) to Top 10 Recipients (Millions of 2000 U.S. Dollars)

1970-71Country

ODA

1988-89Country ODA

2000-01Country ODA

2003-04Country ODA

India 1625 Israel 1553 Russia 815 Iraq 2,157

Vietnam 1227 Egypt 1180 Egypt 789 Congo, D.R. 758

Indonesia 912 Pakistan 485 Israel 555 Egypt 724

Pakistan 584 El Salvador 410 Pakistan 428 Russia 695

Korea 526 India 236 Ukraine 240 Jordan 628

Brazil 421 Philippines 224 Colombia 223 Afghanistan 596

Turkey 421 Pacific Islands 199 Jordan 169 Pakistan 557

Colombia 351 Guatemala 186 Yugoslavia 155 Colombia 506

Israel 199 Bangladesh 174 Peru 154 Israel 495

Laos 187 Honduras 174 Indonesia 154 Ethiopia 472

Total above 6452 Total above 4821 Total above 3682 Total above 7,588

Total ODA 11689 Total ODA 12426 Total ODA 11163 Total ODA 18217

Is foreign development assistance in the economic self interest of both donor and recipient?

Usually. Why? Why aid rather than just relying on

commercial investment flows? Aid relieves a capital constraint that arises in

part due to high risk in developing countries. It can also be tied to technical assistance

How much aid does the United States contribute relative to other developed countries?

United States and World Official Development Assistance (ODA), 1960-2005 (Millions of 2000 U.S. Dollars) (Source: OECD Database)

Year Total ODA U.S. ODA U.S. as % of Total

1960 22256 13137 59.0

1965 28879 17904 62.0

1970 24835 11665 47.0

1975 35514 11150 31.4

1980 49248 13420 27.2

1985 41845 13683 32.7

1990 65578 14108 21.5

1995 64351 8045 12.5

2000 53735 9955 18.5

2001 51121 11163 21.8

2004 69011 17923 26.0

2006 104000 22740 21.9

Trend of total aid and aid to agriculture, 1986-2005

Index

120

110

100

90

80

70

60

50

1985 2005

Total aid

Aid toagriculture

Factors affecting AID budgets

Deficits in developed countries Geo-political concerns Aid fatigue

Is tying aid to technical assistance, education, infrastructure, or policy change a good idea?

Dateline in development of foreign aid system Rockefeller Foundation mission to Mexico FAO groundwork laid First FAO conference World Bank established Organization of American States formed Truman’s Point Four Speech Act for International Development (AID predecessor) Ford Foundation assistance to agriculture FAO headquarters established in Rome Regional Development Banks UNDP established Consultative Group for International Research formed Gates Foundation initiates significant program in

developing countries

1941

1943

1945

1946

1948

1949

1950

1951

1959-1966

1966

1971

1997

Major Development Assistance Programs

Multilateral financial network1. World Bank2. InterAmerican Development Bank3. African Development Bank4. Asian Development Bank5. European Development Fund6. United Nations Development Program (UNDP)7. World Food Programme (WFP)8. United Nations Children’s Fund (UNICEF)9. International Fund for Agriculture and Development (IFAD)10. Organization of Petroleum Exporting Countries (OPEC)11. Caribbean Development Bank

(Table continued)

Bilateral financial assistance

1. U.S. Agency for International Development (AID)

2. Japanese Overseas Economic Cooperation Fund (OECF)

3. Agencies in Germany, France, United Kingdom, and many other countries

4. Nongovernmental Organizations (NGOs)a. Foundations (Gates, Ford, Rockefeller, etc.)

b. Cooperative for American Relief Everywhere (CARE)

c. Catholic Relief

d. Many others

Table 18-4 (cont.)

Technical assistance network United Nations Development Program Food and Agriculture Organization of the United Nations (FAO) Bilateral assistance programs listed above Private Assistance International Agricultural Research Centers (IARCs) Many others

Public Law 480(P.L. 480)

What is it?

Food Aid

Original purpose: Develop market Surplus disposal Security assistance Meet nutritional

needs Promote economic

development

How important is food aid?

10% of all development aid but less than 5% of U.S. agr. exports

Less than 2% of cereals and 1% of food supply in the United States

United States provides about 60% of world food aid

Photo courtesy of World Food Program,

Brenda Barton

Have food aid levels varied over time?

1954 – 65: Surplus disposal

1966 – 72: Idealistic era

1972 – 75: Cuts and loss of credibility

1976 – present: Increased use of food aid for political purposes and famine relief

P.L. 480

Title 1

Recipient buys grain at 3 – 4% interest (or less) over 40 years

Title 2

Gifts, usually distributed through private agencies

Title 3 – Added in 1975. If recipient can show aid reached the poorest people, loan under Title 1 is forgiven

Food aid distribution in Ethiopia (1983)

Food aid issues Conflicting objectives

Surplus disposal Emergency assistance Development Foreign policy

Case for food aid Provides resources Helps poor Can stabilize food

supply and price

Case against food aid Disincentive to provide Dependency Expensive

Conclusion

• Multiple types of Aid• Multiple reasons for giving Aid• Positive and negative impacts• Can be in best interests of donor and

recipients.