Is trade more effective than aid?

GROUP 3: GEOGRAPHY

IBReviewExtras

Closing the
development gap

For an activity to help you debate

the development gap, go to
www.hoddereducation.co.uk/
ibreviewextras

Grace Elliott provides a critical analysis of the role of aid,

trade and debt cancellation in closing the development gap

Exam context
Paper 3: economic flows and interactions examine the importance
of loans, debt repayment, development aid, remittances, foreign
direct investment, repatriation of profits in the transfer of capital
between the developed core areas and the peripheries.

he United Nations (UN) estimates that 1 billion people are

currently living in absolute poverty, i.e. living on less than
$1.25 a day. According to the UN, these people have been
stuck in this position for over 40 years. In particular, the UN
estimates that 40% of those people living in absolute poverty are
in sub-Saharan Africa, which has experienced a total increase of
111 million people in absolute poverty since 1990.

Strategies aimed at closing this widening development gap can be

controversial. Yet, faced with the prospect of continuing economic
divergence alongside increasing international dependency as a result
of globalisation, it has never been as important to engage in this
discussion.

Aid
Aid is the voluntary transfer of resources from one party (such as
an individual, organisation or country) to another, with the aim of
improving the human condition in the recipient receiving the aid.
There are three main categories of aid:
Bilateral aid is given directly by the government of a donor
country to a recipient country.
Multilateral aid is given by a donor country to an international
organisation, such as the World Bank or the European Development
IB Review November2015

Fund, which then uses the money in programmes to assist

developing countries.
NGOs (non-governmental organisations) are primarily charities
that raise money to use for aid programmes, which can be in
the form of short-term assistance (also called humanitarian
assistance) or long-term assistance.

Benefits of aid
It is widely recognised that aid can be beneficial when it helps
countries respond to emergencies. Some argue that aid also has
a role in improving education, agricultural programmes and the
quality of and access to public health.
For example, with the use of aid, new public health institutions
have been formed such as the Global Fund to Fight AIDS,
Tuberculosis, and Malaria (GFATM). This has enabled the scale-up
of vaccine coverage (largely through Gavi, a global vaccine alliance,
and UNICEF) to increase treatment coverage for HIV/AIDS, and has
expanded tuberculosis control.
According to evidence presented by Paul Collier, professor of
economics and public policy at the University of Oxford, aid has
increased the growth process in Africa. He has calculated that,
by a reasonable estimate, over the last 30 years aid has added
around 1 percentage point to the annual growth rate of the bottom
billion. This seems minimal, yet 1 percentage point has made
the difference between very little economic growth and severe
economic decline. Jeffery Sachs, an American economist, is an
advocate of aid and argues that it is a highly
effective developmental tool, best used in
conjunction with sound economic policies,
transparency, good governance and the
effective development of new technologies.

the pockets of wealthy politicians and was often used to finance

military spending. Professor Collier estimated that 40% of Africas
military spending is inadvertently financed by aid, and that military
spending is almost double its level in the absence of aid.
Aid is also inefficiently distributed in many countries. For
example, Nepal has been one of the highest recipients of aid in
the developing world (as a percentage of gross national income),
with foreign aid financing about 95% of government expenditure
between the 1950s and 1970s, yet 25% of its population still live
below the poverty line. Although 47% of the overall aid has gone
into the transport, power and communication sectors, links with
rural areas have been established slowly or not at all. Furthermore,
Nepal has been unable to sufficiently develop its export market to
benefit from better transport links for international trade. According
to Nepals Ministry of Finance, even though agriculture accounts
for 75% of total employment, it has attracted just 23% of total aid
to Nepal.
Aid is more effective when there are clear and transparent
procedures and policies within a country, with effective financial
governance. However, this can be problematic, as it could imply that
the countries with the worst problems should get the least money.

Making aid more effective

Aid can be more effective when it is used as an incentive for reform.
For this to happen, the incentives must closely align with the
priorities of the recipient government, with clear consequences if

Failings of aid
Despite political promises from developed
economies to provide aid, it is important
to note that increasing the amount of aid
does not necessarily cause the growth
rate to increase. The Center for Global
Development claims that when aid reaches
about 16% of the recipients gross domestic
product (GDP), it ceases to be effective in
achieving its aim. For example, according
to the World Bank, between 2010 and 2012
Liberia received aid that on average totalled
72.4% of its gross national income (the
equivalent of $681 per person over the 3
years). Despite this aid, 47.9% of Liberian
citizens still live in absolute poverty.
One argument for the failure of aid to
achieve development is that the funds are
not well spent in many of the countries
of the bottom billion. This is largely due
to a culture of corruption. For example,
a 2004 expenditure-tracking survey in
Chad indicated that less than 1% of the
money released for rural health clinics by
the Ministry of Finance actually reached
the clinics. Instead, the aid went into
www.hoddereducation.co.uk/ibreview

A survey in Chad indicated that less than

1% of funding earmarked for rural health
clinics actually reached the clinics

the conditions are not met. Aid can also be used to increase the level
of skills among the population. This must be combined with sound
governance and economic policies that attract foreign investment
into the country to create employment opportunities and develop
human capital.
Suppose that a country receives a large donation to assist with
a failed harvest. While this solves the immediate humanitarian
disaster, clear governance by the recipient government regarding
agricultural reform must be put in place if market forces are to
restore the incentive for farmers to plant and harvest crops.

Trade
Can changes to trade policy reverse marginalisation? Given the
shortcomings of aid in effectively addressing the need for growth

and development, economists have argued that international trade

has the ability to make major contributions to economic growth and
development within a country.
This will only happen if rich economies abandon their
protectionist policies. For example, some developed countries give
subsidies to their farmers to ensure they can sustain their output of
agricultural produce, but in doing so they close off opportunities
for those in poor countries. International organisations such as the
World Trade Organization (WTO) have done little to prioritise the
improvement of trading conditions for the poorest countries. The
WTO has not helped developing countries engage in formal trade
dispute settlements, due to the extended litigation process this
requires. A more effective solution, in which trade policies could
reverse economic decline, would be an unreciprocated reduction in
trade barriers for the poorest countries.
It is also possible to use aid to help overcome obstacles to trade.
A portion of aid could be used to support the development of
institutions and infrastructure that improve a developing countrys
ability to efficiently export its produce. This approach requires that
aid and trade policies become more closely aligned. Policies would
be geared towards increasing exports, and financial support would
be based on strengthening the ability of developing countries to
pursue export-driven growth.

Debt cancellation

Aid donations can solve short-term crises, but

must be accompanied by effective governance
if they are to help in the long term

Questions and activities

1 Should banks continue to lend money to countries that have
recently been granted debt relief?
2 In what ways is migration changing the approach to development
issues?
3 Trade not aid is the answer to closing the development gap.
Discuss this statement.
4 Trade is putting all the worlds wealth into the hands of the richer
countries. Discuss this statement.

Would the cancellation of debt in the worlds poorest countries

facilitate their development? Nearly 30 years have passed since the
onset of the debt crises for heavily indebted poor countries (HIPCs)
such as Uganda and Rwanda, yet most are still suffering from the
consequences. The debt crises emerged when the official flow of
aid fell in the 1970s, resulting in the poorest countries borrowing
money from private banks in wealthier countries. These banks
were happy to lend money due to the oil price shocks of 1973 and
1979 and the subsequent recession, which resulted in fewer lending
opportunities for the banks. The debt crises emerged because private
banks failed to predict that the HIPCs would be unable to make the
repayments.
At a cost of $74 billion, the International Monetary Fund (IMF)
recently approved debt cancellation for 36 HIPCs, 30 of which are in
Africa. One argument against this was the fear that new debts would
be accumulated to replace the old.
Professor Collier argues that HIPCs in Africa must continue
to borrow because they are not investing enough, so need more
borrowed funds to prevent continued divergence from other
developing countries. During the past decade of economic growth
in countries such as Brazil, China, India and Mexico, many African

Theory of knowledge
1 To what extent can mathematical techniques be used to make
accurate predictions about development in the poorest countries?
2 Do emotions or intuition have a larger role in convincing people
to strive to close the development gap?
3 Are reason and emotion equally necessary in justifying solutions
to closing the development gap?
4 If development is about economic issues, debate surrounding
moral obligations should be avoided. Discuss this statement with
reference to philosophical views of emotion, beliefs and reason.

IB Review November2015

Glossary
Absolute poverty First used in 1990, the dollar-a-day poverty line
measured absolute poverty by the standards of the worlds poorest
countries. In 2005, the World Bank defined a new international
poverty line of $1.25 per day, to account for price inflation.
Bottom billion Refers to the poorest 1 billion people on Earth,
whose living standards are falling further and further behind the
majority of the worlds population. The term was coined by Paul
Collier (see References and resources box).
Gross domestic product (GDP) The monetary value of all finished
goods and services produced within a countrys borders in a specific
time period, usually 12 months.
International migration The movement of people across
international boundaries.
Marginalisation The social process of exclusion, e.g. countries
being unable to trade within global markets.
Protectionist policies Economic policies that restrain trade between
countries, e.g. taxes on imported goods and restrictive limits (quotas)
on imports.
Remittance The transfer of money from a foreign worker to an
individual in his or her home country.

countries have continued to grow considerably more slowly on a per

capita basis. An underlying reason for the slower growth of HIPCs
is their markedly lower rate of investment around 20% of GDP
compared with 49% in China. Economists argue that African HIPCs
must fund their development through foreign direct investment
(FDI) to prevent the return to economic crises.
However, the money that was borrowed previously was often not
invested wisely. For example, during 200708 Ghana successfully
borrowed commercially, but then used the money to finance
consumption in the run-up to an election. Furthermore, many
developing countries do not have the infrastructural capacity (such
as factories, road networks and airports) to absorb the extra FDI
productively.

Remittances
Does international migration facilitate development?
International migration has enormous implications for growth and
poverty alleviation in both origin and destination countries. By
allowing workers to move to where they are most productive, overall
world income should increase through money that is sent home
in the form of remittance payments. Remittances can reduce the
level and severity of poverty and lead to higher human capital
accumulation, greater health and education expenditures, better
access to information and communication technologies, and
improved access to financial services. These benefits can help low
income countries break the cycle of poverty.
According to the World Bank, remittance payments to developing
countries totalled $404 billion in 2014, an increase of about 3.3%
on the previous year. In Nepal, remittances have been more effective
than aid in reducing poverty. In 2013, every day nearly 1,500
Nepalis migrated abroad to work. These migrants sent back about
$4 billion in total to their families, which accounted for a quarter of
the countrys GDP. The remittances provided additional income to
support households in improving their quality of life.
www.hoddereducation.co.uk/ibreview

However, the international mobility of workers has significantly

reduced the skills available to provide for growth within Nepal. In
particular, the departure of men to the Gulf states and Malaysia to
work in factories and on construction sites has caused a shortage of
agricultural labourers in Nepal. Furthermore, a substantial spike
in revenue from a single industry can have adverse impacts on the
rest of the economy. Economists refer to this as Dutch disease
after the effects of North Sea gas revenues on the Dutch economy.
While remittances provide short-term relief, the economy of Nepal
cannot over-rely on this method, as it is not a sustainable method of
economic growth.

Empowering the poorest

In summary, the path to development for the bottom billion is
complex, made more so by the incoherence of the international
trade, aid and debt-relief policies of high-income economies. It is
clear that these policies need to be better aligned and implemented
under an umbrella of more effective global governance. It requires
the empowerment of developing countries, giving them a voice in
resolving trade disputes via the WTO and holding governments
accountable to international governance and standards as well
as creating investment opportunities. These steps are critical to
reversing the divergence of the poorest economies from the rest of
the world.

References and resources

Books
Collier, P. (2007) The Bottom Billion: Why the Poorest Countries are
Failing and What Can Be Done About It, Oxford University Press.

Sachs, J. (2005)The End of Poverty: Economic Possibilities for Our

Time, Penguin.

Online resources
Guardian articles on global development:
www.theguardian.com/global-development
Jubilee Debt Campaign: www.jubileedebt.org.uk
World Bank summary of development in Nepal:
www.worldbank.org/en/country/nepal
BBC News profile on Nepal: www.tinyurl.com/7duf665

Guardian report on Nepalese migrant labour:

www.tinyurl.com/kza6odb
UN report on Nepals progress towards the Millennium Development
Goals: www.tinyurl.com/okd3ttg

Key points
Aid can be an effective developmental tool, but only with effective
governance, transparency and sound economic policies.
Changes to global trade policies are required to reverse
marginalisation.
Public and private investment is required in the poorest countries.
Migration is changing the development debate.

Grace Elliott teaches geography at Wellington College, UK.