Aid
Economics: Edexcel A A Level, topic 8.2.8
Aid vs Trade
'Aid or trade' is a long-standing debate in economics, regarding the best way for a less-developed economy (LDE) to develop. But a combination of the two is not an uncommon model for such countries.
Types of aid
- Bilateral aid - aid between one government and another.
- Multilateral aid - aid provided by many governments instead of just one government.
- Tied / conditional aid - when one country donates money or resources to another (bilateral aid) but with conditions attached.
- Charitable aid - funded by donations from the public through organisations such as Water Aid.
- Non-financial aid - donation of items, such as malaria nets.
Trade
- Export-led growth and trade with other countries enable an LDE to be self-sufficient and reinvest the proceeds of such an approach.
- But many LDEs are restricted by issues such as worsening terms of trade - meaning that their exports are continually falling in value relative to more high-end imports.
- A lack of skilled labour and capital may also mean that LDEs don't have the resources to focus on a profitable export industry, making this strategy unrealistic.
Limitations of Aid
Here are some of the arguments for why the benefit of aid is limited:
Corruption
- Corruption can restrict aid from getting to where it needs to go.
Conflicts of interest
- Aid can lead to less economically developed governments focusing on keeping the donors happy rather than on their own citizens.
Aid dependency
- African economist Dambisa Moyo argues that a dependency culture on aid might be created, where no government has an incentive to improve.
Market distortions
- Firms will focus their resources on trying to secure aid, rather than putting their resources to the best use.
Support for Aid
Here are some of the positive aspects of different types of aid:
Savings gap
- Less-developed economies (LDEs) have a savings gap and aid can provide a way of filling that gap.
Increasing the LRAS
- Project aid can help with building infrastructure to increase the capital stock, especially energy (e.g. electricity generation, to improve efficiency).
Benefiting human capital
- Aid can improve healthcare outcomes.
Mutual benefit
- Donor countries benefit because recipient countries grow and then demand exports from the donor country.
Test yourself on Aid
Which of the following are types of aid?
Which type of aid is provided by many governments (rather than just one)?
Which of the following are arguments against aid?
Which argument against aid suggests that governments will have little incentive to improve?
Which of the following is NOT a benefit of aid for an LDC?