Foreign aid vs. International trade
Foreign aid vs. International trade

Foreign aid vs. International trade

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  • Pages: 7 (3129 words)
  • Published: October 23, 2017
  • Type: Case Study
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Foreign assistance vs. international trade is a long permanent argument as to which scheme leads to the greatest degree of economic development. Foreign Aid is defined as any aid that is given to a state non provided through normal market forces. There are legion signifiers of assistance. from human-centered exigency aid. to nutrient assistance. military aid. etc. Development assistance has long been recognized as crucial to assist hapless developing states grow out of poorness. International trade is the exchange of goods or services across international boundary lines. Economic development every bit defined by AmartyaSen. 1998 Nobel award laureate. “requires the remotion of major beginnings of unfreedom: poorness every bit good as dictatorship. hapless economic chances every bit good as systematic societal want. ” ( 1 )

In 1970. the world’s flush states agreed to give 0. 7 % of their GNI ( Gross National Income ) as official international development assistance. yearly. Since so. these rich states have seldom met their existent promised marks. “The US is frequently the largest giver in dollar footings. but ranks amongst the lowest in footings of run intoing the stated 0. 7 % mark. ” The two charts below. reproduced from the OECD publications ( 2012 ) shows assistance granted in changeless dollars and as a per centum of GNI. Both support the decision sing the failure to run into in agreement upon assistance committednesss and the degree of diminishing contributions. ( 2 ) Billions have been donated. but it appears that Africa which has received the most assistance remains a continent impoverished.

As Dambisa Moyo


in the Wall Street Journal writes “money from rich states has trapped many African states in a rhythm of corruptness. slower economic growing and poorness. Cuting off the flow would be far more beneficial…… . the insidious assistance civilization has left African states more debt-laden. more inflation-prone. more vulnerable to the vagaries of the currency markets and more unattractive to higher-quality investing. It’s increased the hazard of civil struggle and unrest … . . Aid is an unmitigated political. economic and human-centered disaster” . ( 3 ) Wall Street Journal. March 21st. 2009

Over the past 60 old ages at least $ 1 trillion of development assistance has been granted to Africa. And unluckily existent per-capita income in 2014 is less than it was in the seventiess. “More than 50 % of the population — over 350 million people — live on less than a dollar a twenty-four hours. a figure that has about doubled in two decades” ( 4 ) Wall Street Journal. March 21st. 2009

In 2005. the International Monetary Fund’s study “Aid Will Not Lift Growth in Africa. ” concluded that authoritiess. givers and candidates should be more modest in their claims that increased assistance will work out Africa’s jobs. ( 5 )

Historically Asia was underdeveloped excessively. Yet assorted policies by authoritiess to heighten international trade have resulted in many Asiatic states i. e. Korea. Taiwan. Malaysia. and Singapore accomplishing dramatic economic growing and along with it. higher criterion of life for its citizens. Dato Kim Tan. the co-founder and legal guardian for the Transformational Business Network ( TBN

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) wrote “growing up din Asia. I saw the Asiatic tiger economic systems that 30-40 old ages ago had a lower GDP than Uganda or Kenya. transform themselves through endeavor. non through assistance and philanthropic gift. ”

( 3 ) Paul Kagame. President of the Republic of Rwanda and that country’s foremost democratically elected president wrote: “There is bad assistance and there is good assistance. The bad assistance is that one which creates dependences. as we’ve known for a long clip now. But good assistance is that which is targeted to make capacities in people so that they are able to populate on their ain activities. … In the long-run they have to depend on themselves instead than depend on assistance. ” ( 4 )

Poverty Remedy

The issue to be addressed is whetherforeign assistance achieveslong-term growing and development – is it a positive or negative accelerator to economic well being. And the corollary to this statement is whether international trade is a better option to economic accomplishment.

Trade Theory:

The historical footing for reasoning that there is addition from trade originates from David Ricardo’s work: Principals in Political Economy and Taxation. The historical context of the clip was the protectionist English maize Torahs. curtailing wheat imports. Ricardo’s decision. arrived at by his theory of comparative advantage. showed that states could profit if they specialized and promoted free trade.

Figure 1: Comparative Advantage

State A has an absolute production advantage of both goods A and B because it can bring forth more of these goods. Since the PPC is non parallel we can assume that the chance cost are both different. As a effect specialisation and reciprocally good trade can happen. Country A has a comparative advantage in the production of good B and Country B has a comparative advantage in the production of good A. State B PPF curve has a lower incline therefore its comparative advantage of production is the good on the horizontal axis.

To set up a policy of international trade. authoritiess need to develop programmes that require of import alterations in the society. For illustration. provinces must develop competitory market economic systems based on environmental sustainability. substructure. set up a stable currency. a crystalline political model and legal system. security. and educated public as requirements.

Good A= Capital Goods
Good B= Consumer Goods
Figure 2: PPF curve with improved production via exports

Country A allocates its resources to largely ingestion. Country C allocates its resources towards investment/capital goods. States that allocate their resources chiefly in investment/capital goods are greater to hold long-run growing than those states who are more focussed on ingestion who are utilizing up more current resources. With regard to Aid. money that is allocated to current ingestion will non better hereafter conditions where as assistance money allocated for such production of substructure. wellness. etc. will in the long tally exhibit economic growing.

Interestingly. South Korea’s economic growing from the early 1960s to the late 1990s was one of the world’s fastest. and South Korea remains one of the fastest turning developed states in the 2000s. This experience is known as the Miracle on the Han River. Like many developing society’s. S. Korea possessesno natural resources

and suffers from overpopulation. In add-on. the Korean War destroyed much of its substructure. The solution was South Korea accommodating an export-oriented economic scheme. Unusually in 1980. the South Korean GDP per capita was $ 2. 300. about tierce of nearby developed Asiatic economic systems such as Singapore and Japan. In 2010 South Korean GDP per capita advanced to $ 30. 000 – about 13 times since 1980. ( See two charts below on Korean Economic Growth and South Korean Economic Recovery after 1997. )

It is acknowledged that the Korean GDP per capita in 1960 was lower than some sub-Saharan African states. The growing of the Koreanindustrial sector was the chief stimulation to economic development. It is true that ab initio some foreign assistance was granted by the U. S. given the combative communist menace. however. it was from strong domestic authorities support and a move toward competitory markets and international trade that resulted in the investing of modern engineering and freshly built installations at a rapid gait. The export to foreign markets and the ploughing of the foreign currency back into farther industrial enlargement was the scheme for growing.

In add-on. this economic scheme suited South Korea given its hapless natural resource gift. low nest eggs rate. and little domestic market. Labor-intensive manufactured exports. permitted South Korea to develop a competitory advantage. No uncertainty authorities enterprises were indispensable to this procedure. “The influx of foreign capital was greatly encouraged to supplement the deficit of domestic nest eggs. These attempts enabled South Korea to accomplish rapid growing in exports and subsequent additions in income. ” ( 5 ) Finally. the ulterior development of a alone transnational house known as the chaebol – family-controlled houses having legion international endeavors. enhanced Korean economic growing.

There is strong cooperation with authorities having fiscal support and counsel i. e. invention and research. Today of these multinationals are Samsung. Hyundai. and LG. Therefore. it is apparent that South Korean enlargement and wealth for its people has derived from the acceptance of a competitory market fabricating economic system. and the development of a hi-tech commercethat emphasizes international trade. Foreign loans. supportive authorities policies. and non aid have been the critical accelerator to such a Han miracle.

Aid Theory:

Aid aids. largely economic which is usually provided to hard-pressed communities or developing states for the sweetening of their socioeconomic status. Aid is linked to necessitate. is frequently non linked to the ability to heighten trade. Trade can ensue in inefficient distribution of income while if assistance is mishandled the distribution of assistance will be unjust. with people being deprived of the benefits of assistance and consequence economic growing of the state. Does Aid lead to the constitution of good substructure? Development assistance is given by authoritiess. i. e. the US being the largest assistance giver in the universe ( As of 2010 ) and other organisations such as the World Bank. “Aid to all states in the universe declined” ( 2007. World Bank ) An overview of a figure of African states that have been receivers of assistance will see the usage and allotment of the foreign assistance. and assess the

result of these contributions upon the public of the continent.

One would observe ab initio that there is a demand for human-centered assistance to help in exigencies and alleviate agony but long term growing and development requires a different attack. Besides charity assistance is a minimum part of the over-all assistance from authoritiess. In the Democratic Republic of Congo. harmonizing to a study by Transparency International. the Zairian president Mobutu Sese Seko ( 1965-1977 ) is listed as holding embezzled at least $ 5 billion signifier the state. ( 6 ) Transparency International In 2009. the former president of Malawi – Bakili Muluzi was prosecuted for stealing $ 12 million allocated for assistance. And Zambia’s former president. Frederick Chiluba is under probe for taking 1000000s from money that was set aside for wellness. substructure. and instruction.

Therefore. these illustrations of corruptness pervert the chance for assistance to help the mean African better their conditions. Economic theory will stress that inefficiency will ensue from authorities intercession and in peculiar ‘free’ financess. Bad authorities worsens the state of affairs as they are frequently bureaucratic in add-on to pervert. The civil service is inefficient and vulnerable to cronyism which has effect for responsible administration. Economic inducements are nullified and authoritiess need non react to citizen demands. Investors require transparence in authorities and concern but such a requirement is non required when contributions are the beginning of financess. Policies such as revenue enhancement can be deferred since contributions flow in to the state. The precedence is to stay in power. Africa continues to be the most unstable part. There are legion illustrations of civil discord as exemplified by the current war in Southern Sudan and The Congo.

Harmonizing to the Stockholm International Peace Research Institute. Africa had a greater figure of wars than elsewhere in the universe. Obviously. such discord has immense impact upon day-to-day life and thwarts any possibility of private investing. Aid therefore fills the vacuity. As stated in his book. Dead Aid: Why Aid Is Not Working and How There is a Better Way for Africa. by D. Moyo. “…aid-financed attempts to force-feed democracy to economic systems confronting poorness and hard economic chances remain. at best. precariously vulnerable. ” ( 7 ) Further grounds of endemic jobs is observed in Nigeria. This authorities is one of the most mismanaged in Africa.

For illustration. during the World Economic Forum of 2005 in Davos Switzerland. four province governors were being investigated in the U. K. for money laundering. Large sums of assistance are looted. “Speaking at the New Partnership for African Development ( NEPAD ) meeting in Abuja. Nigeria. in December 2003. the former British secretary of province for international development. Lynda Chalker. noted that 40 per centum of the wealth created in Africa is invested outside the continent. ” ( 8 )

Advantages and Disadvantages to Trade:

Trade provides development states with an of import base for their ain betterment. States can develop their ain schemes and results to accomplish their development aims i. e. concentrating on agribusiness of fabrication services. States are the determiners of their ain economic fate. One trouble of trade is the international economic

system imposes hindrances i. e. trade barriers. The planetary market is non an international free trade market i. e. duties. revenue enhancements and subsidies. ordinances and such limitations operate to the disadvantage of the developing states. The donor state puts limitations on the recipient state i. e. the demand for authorities transparence. human rights. political support at the UN or Ideological support. Japan additions support from little states on giant killing/harvesting utilizing trade.

Developing states have weak economic power to dispute economic unfairnesss i. e. EU and USA have big plan of subsidies and economical protectionism. One statement states that trade is a foundation for international cooperationi. e. one state is the resources base and the other importing state is the fabrication base. Trade would benefits those states who are engaged in trade ( based on the market ) . Trade relationships would ensue in a more just partnership and therefore might be a accelerator for investing and growing.

Developing state could have direct foreign investings and the benefits that would action from that. engineering. employment etc. The consequence of this would take to lower monetary values. greater pick. more efficient allotment of resources. foreign exchange and thought fluxing between states. Once acquiring passed trade hindrances it can seen as long-run development scheme for a underdeveloped state. A sum-up of the advantages and disadvantages:

A state may import things which it can non bring forth
Maximal use of resources
Benefit to consumer
Reduces trade fluctuations
Use of excess green goods
Stephen fosters international trade
Import of harmful goods
It may wash up resources
Over specialisation
Danger of famishment
One state may derive at the expensive of another
It may take to war

Advantages and Disadvantages to Help:

Aid has been said to diminish the development for states with their ain betterment. Aid has many advantages but as it can be seen utilizing illustrations such as African states it can be seen that assistance has decreased the development for states. States can be giving assistance for ethical grounds. if there was a natural catastrophe and were in demand of aid. Aid is based on demand. assistance permits to states to retain their self-respect because assistance if frequently perceived as condescending. There are different types of assistance. tied and unfastened. Tied assistance is foreign assistance that must be spent in the state supplying the assistance or in a group of selected states. Untied assistance is assistance given to developing states. which can be used to buy goods. and services in virtually all states.

Jeffery Sachs ( UN adviser ) argued that assistance is of import. it is indispensable to interrupt the poorness rhythm and a determiner of long term growing. His statement stated that hapless states are non affluent because of diseases such as malaria. they need to take jobs such as disease because the free market will non due this.

Giving of assistance is perceived as an incentive to act or back up certain policies. Aid can be used as blackmailing or acquiring the upper manus on another state in order to derive their ballot in the UN.

William Easterly ( Professor of economic sciences. NY university ) . assistance does more injury than good. its frequently wasted. it inhibits

peoples ingeniousness. inventing their old solutions. Aid is corrupt because its given to pervert functionaries and frequently its disconnected that there is many givers and misallocations of the financess. Aid frequently comes with a batch of stipulations. Furthermore. assistance has frequently come with a monetary value of its ain for the underdeveloped states.

Aid is frequently wasted on conditions that the receiver must utilize overpriced goods and services from donor states. Most assistance does non really travel to the poorest who would necessitate it the most. Aid sums are dwarfed by rich state protectionism that denies market entree for hapless state merchandises. while rich states use assistance as a lever to open hapless state markets to their merchandises. Large undertakings or monolithic expansive schemes frequently fail to assist the vulnerable as money can frequently be embezzled off.


In decision. it appears that by and large merchandise is more good to long-run growing and development than assistance. African illustrations discussed are proof that assistance is counterproductive and the route to economic failure. The opposite appears true. Those states able to disassociate themselves from assistance dependence are more likely to win as evidenced by China. India. and even South Africa. A scheme of crystalline authorities. efficient civil service to run into societal demands i. e. instruction. inducements. entrepreneurship. the regulation of jurisprudence. patent protection. establishments to pull foreign direct investing by making attractive revenue enhancement constructions and cut downing the ruddy tape and complex ordinances for concerns.

Private capital investing into sustainable companies. with assistance straight to community based non-profitable organisations is recommended. African states should besides concentrate on increasing trade. but there have been instances where rapid growing in international trade has led to constrictions and hindrances to growing and development. There appears to be no Panacea but one does reason that in order to accomplish economic. societal. and political advancement there are indispensable non-economic and economic requirements – cultural ( i. e. individuality. attitudes of personal accomplishment. difficult work. etc. ) political ( i. e. crystalline authoritiess. stableness. the regulation of law. ) and economic ( i. e. substructure. communications web. virtue goods i. e. instruction and wellness etc. ) .

Each state is alone with respect to merchandise and help. The reply is non either or – assistance or trade. but accountable and crystalline assistance in concurrence with sustainable trade and honest and efficient authorities.

Bibliography: ( Complete bibliography after cheque by Ms. Kerr )

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10. hypertext transfer protocol: //www. guesspapers. net/1593/advantages-and-disadvantages-of-international-trade/ 11. hypertext transfer protocol: //www. moeasmea. gov. tw/ct. asp? xItem=72 & A ; CtNode=263 & A ; mp=2 12. hypertext transfer protocol: //www. globalissues. org/article/35/foreign-aid-development-assistance 13. hypertext transfer protocol: //www. ryanallis. com/sustainable-capitalism-and-the-role-of-aid-vs-trade-in-prosperity-creation/ 14. hypertext transfer protocol: //www. cato. org/publications/economic-development-bulletin/african-perspectives-aid-foreign-assistance-will-not-pull-africa-out-poverty