Economics LDC Types of Aid

Figure 1:  The Harrod-Domar model

                 

        

There are two main types of aid; bilateral and multilateral, which can be given in different forms. Bilateral is aid from one country to another. This is frequently done in the form of a loan, often subject to a long-term repayment, “decided as elastic or below market terms”. The second type of aid, known as Multilateral is aid given to some sort of organization such as the World Bank, who then chooses who to give it to. This is also called official aid, which is “administered by government or government agencies”. A question of the actual efficiency of aid is often questioned. Often it is distorted into some corrupt political regimes, especially in supplying arms, and exalted projects rather than to the ordinary developments, more likely to capitulate better results. Most aid is also tied, meaning that aid is only given if the recipient country agrees to buy goods and services from the donor nation. Loans can also come from banks or other financial organisations often in the developed world. These are known as commercial loans. Attracted by the rising commodity prices in the mid 1970’s, many developing countries extensively borrowed from banks to fund development. However, with higher interest rates and falling commodity prices in the 1980’s and the 1990’s “many defaulted their loans and many other loans had to be re-scheduled.” Another form of aid or rather the direct lending of very small amounts of money are micro-credit schemes. These are very small amount of money, as little as 1$ a day handed directly to those in need by an NGO (Non-Governmental organization) and reflects the circumstance in which the recipient is in. In some areas micro-credit schemes are addressing the financial needs of the deprived. The Grameen Bank is the best known example of a micro-credit scheme organization.

Development can also create a dual economy. Signifying that one section is the continuing economy where wages are low, and the other section is the newly industrialising one, where firms invest capital. This could also lead to volatility in the market, growing dissatisfaction and widening gaps of inequality. This issue is apparent in China for example where, “the government is concerned about growing rural unrest as the hundreds of millions of rural poor are left behind in Chinas surging economy.” “There is a sense that if they continue to grow they could pose a major threat to Chinese stability.” In terms of economics however, the existence of the first plays an important role in supplying the pool of labour. The industrialising one can operate effectively, as it is perfectly elastic in terms of supply. The successful expansion of the industrial sector will propagate a duo-economy. The negate factor can be, the ability for an LDC to acclimatize at once, which may considerably increase a dual economy.

        Indisputably investment plays a crucial role in increasing the growth rate. Although initially reducing consumption as resources are drawn into the investment industries, it results in an increased growth rate and higher consumption of goods and services in the future. Foreign direct investment, done through multinational corporation (MNC’s) may boost the rate of growth, inject money into the local economy and provide training and education. The rapid expansion of private direct foreign investment into LDC’s since the 1960s and 1970s has been largely due to the activities of the transnational conglomerates. “Furthermore, many of them are colossal in size and control more economic resources than the whole GNP of many less development countries.”   However, MNC’s bring about widening inequalities, capital-intensive production schemes, and exploitation of local labor and send back profits.  This could also lead to instability in the market, mounting dissatisfaction and broadening cracks of disparity.

Several developing countries may also practise an inward-bound strategy. This is often done in the form of protectionism; implementing a policy of “import substitution”, by which domestic industries are heavily protected in order to replace imports. While “returns on selling raw products are less than on semi-processed or processed commodities” and higher import and export taxes on these goods than processed goods, it may be striking for developing countries to want to expand into the processing of their own commodities. Alternatively a country might incorporate a policy of export guided by economic growth based on the gradual removal of trade barriers and the opening up of certain industries to the global competing economies.

The terms of trade also tend to move against the late arrival, especially those that are producers of primary products, thus developing countries. Sierra Leone for example, is a so called “banana-republic” economy, as the case with many other developing countries. They are very reliant on their primary exports earning from only hardly any national products. A blend of low prices and income elasticity of demands of demand for primary goods and the propensity to save raw materials as technology improves elsewhere. Fair trade organization exists “who guarantee farmers and producers a 'fair' price for the goods they produce.” This generates an extent of price growth and development, which can then, take place at a more consistent level.

The final, arguably the most essential aspect of aid, is the concept of sustainable development. This means that they are attempting to grow today without damaging the prospects for development for future generations tomorrow. Some doubt if this is really possible but to achieve it means investing more in such courses of action as:

• Recycling
• Using alternative methods and resources to generate power etc
• Watching our biodiversity
• Admitting to both social costs and benefits and accepting that someone has to pay the true cost of resource allocation.

Source: Triplea

        Purely said, economic growth and development is of the essence, a fundamental and an imperative aspect for every developing nation, because after all when it comes down to the basics of economics, “growth is good”, and is treated as the stepping stone as a set view of growth and development throughout multinational economies. But in relation to developing countries one must not disregard they’re current status and the structure of the economy. Adopting these new schemes might not be appropriate and often these countries are furthermore weighed down by the lack of legal framework. Sustainable Development has become the new format for neo-classical and Keynesian economists, in regard to developing nations, however the problem lies on the fact of the blindness of more economically developed countries, who tend to ignore the concept of the LDC’s, that more is better!

BIBLIOGRAPHY (Sources)

1. Peter Smith, "Primary producers and the terms of trade", 21(3), February 2004

2. Peter Smith, "Economic growth and development", Question and Answer, 17(3), February 2000

3. Triple A Interactive Online textbook

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4. BBC World News, “China pledges help for rural poor”; Sunday, 5 March 2006.

(http://news.bbc.co.uk/2/hi/asia-pacific/4775350.stm)

5. Economics from a global perspective, Alan Glanville, Edition 2 (Green Book), pg 516

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