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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?
The University of Papua New GuineaSlide 3
Lecture 18: International Aid Michael Cornish
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 University of Papua New GuineaSlide 4
Lecture 18: International Aid Michael Cornish
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…)
The University of Papua New GuineaSlide 5
Lecture 18: International Aid Michael Cornish
Trends in International Aid
Source: OECD DAC Development Cooperation Report 2010
The University of Papua New GuineaSlide 6
Lecture 18: International Aid Michael Cornish
Australia’s aid program
Source: Aust. budget documents
The University of Papua New GuineaSlide 7
Lecture 18: International Aid Michael Cornish
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)
The University of Papua New GuineaSlide 8
Lecture 18: International Aid Michael Cornish
The University of Papua New GuineaSlide 9
Lecture 18: International Aid Michael Cornish
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
The University of Papua New GuineaSlide 10
Lecture 18: International Aid Michael Cornish
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)
The University of Papua New GuineaSlide 11
Lecture 18: International Aid Michael Cornish
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
The University of Papua New GuineaSlide 12
Lecture 18: International Aid Michael Cornish
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)
The University of Papua New GuineaSlide 13
Lecture 18: International Aid Michael Cornish
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)
The University of Papua New GuineaSlide 14
Lecture 18: International Aid Michael Cornish
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)
The University of Papua New GuineaSlide 15
Lecture 18: International Aid Michael Cornish
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
The University of Papua New GuineaSlide 16
Lecture 18: International Aid Michael Cornish
-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 University of Papua New GuineaSlide 17
Lecture 18: International Aid Michael Cornish
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?
The University of Papua New GuineaSlide 18
Lecture 18: International Aid Michael Cornish
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
The University of Papua New GuineaSlide 19
Lecture 18: International Aid Michael Cornish
Is aid a good thing?
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
The University of Papua New GuineaSlide 20
Lecture 18: International Aid Michael Cornish
Is aid a good thing?
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 University of Papua New GuineaSlide 21
Lecture 18: International Aid Michael Cornish
Is aid a good thing?
The verdict?
• Evidence mixed…
• Lack of counterfactual
• Econometric studies
• Poverty reduction
• The equity argument
…and perhaps the better question is:
The University of Papua New GuineaSlide 22
Lecture 18: International Aid Michael Cornish
How can we improve aid?
• My preferred approach – consider these three
elements:
– Recipient
– Donor
– The relationship between the two
The University of Papua New GuineaSlide 23
Lecture 18: International Aid Michael Cornish
How can we improve aid?
Recipient:
• Governance-centric
– Conditionality
• Domestic influences / political support
– Technical assistance
• But is there commitment to reform?
The University of Papua New GuineaSlide 24
Lecture 18: International Aid Michael Cornish
How can we improve aid?
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 University of Papua New GuineaSlide 25
Lecture 18: International Aid Michael Cornish
How can we improve aid?
The relationship:
• One recipient, but many donors
• Heavy transaction costs
• Harmonisation
• Alignment