Trade Vs Aid

Trade: The action of buying or selling good and services.

Aid: Money, goods or services given from the government of one nation or a multilateral organisation to another government.

 

There are a number of different ways in which aid can be distributed:

 

  • Short Term Aid – Given in response to a sudden problem in a country. Also known as emergency aid. An example of this was during the Boxing Day Tsunami the UK Disaster Emergency Committee raised £392 million in public donations.
  • Long Term Development Projects – This is planned aid given to a country in order for it to improve an issue in the long term. For instance the UK’s long term UKAID policy to increase equality of women in the third world. This is being achieved through donations towards education and training for women in many third world nations, such as Sudan.
  • “Top Down Aid” – A responsible body directs the operation “from the top”. An example is the bilateral donations from the UK to Malaysia to support the Pergau Dam being completed. This would bring electricity to the area and lower the cost of this, having positive impacts of both domestic and business conditions.
  • “Bottom Up “ Aid – These projects work closely with local communities and use local knowledge and ideas to bring about change. For instance this could be through measures to try and decrease unemployment in Gaza (highest in the world), such as the Oxfam led initiative to employ 60 local people to produce school uniforms for school children in the area rather than importing them.

 

These can be given on a number of different scales:

 

  • Bilateral aid – Aid given directly from one government to another.
  • Multilateral aid – Aid given by governments to multilateral organisation such as the World Bank who go onto to distribute the aid.
  • Non-Governmental Organisations – These are generally charities who fundraise money and distribute this money to those who need it.

 

 

Benefits of Aid:

  1. Helps countries react rapidly to natural disasters and other natural hazard preserving the highest possible number of lives.
  2. Can help nations to reach a level of development where they will no longer need to rely on aid. Aid can help nations to achieve the preconditions for take off in the rostow stages of growth. Many LDCs have structural problems such as HIV/AIDs epidemics or regular famines which prevent growth occurring without provision of clean water and other necessities being completed first.
  • For example a recent article by the Guardian found the Ghana would no longer need international aid in 5 years time as it had helped deal with structural problems meaning that growth could take over. Incidence of Malaria has fallen by 50% and rural agricultural productivity had risen by 100%. TNCs such as Carrefour are investing in stores in Ghana.
  • In Bangladesh aid has helped to fund family planning services through community health workers. This along with improvements in healthcare and contraception has led to the birth rate falling from 6 to 2 children per women in 3 decades. This gives the government the ability to spend more of its limited resources on ensuring these children are well educated etc.
  • Some other forms of international aid aim to try and lower infant mortality rate through improved training. Currently a baby is 10c more likely to die during childbirth than in the UK. Projects such as Oxford University’s LIFE smartphone game aimed at helping kenyan health worker learn how to deal with child birth complications.  
  1. Aid helps countries to build up their tax bases so they can fund public services.
  2. Aid can be used in the long term to build infrastructure that will promote foreign direct investment from TNCs in a nation. Aid from China to African states has currently led to over 1000 infrastructure projects being built including road and rail networks.
  3. HIPC and MDRI have helped nations to improve their credit rating with credit rating agencies meaning that they can borrow again on international markets at lower, more affordable rates of interest.

 

Problems Associated with Aid:

  1. Aid can not reach those most at need. For instance British Aid given the the government of Malawi in 2013 was stolen by Civil Servants in a scandal known as Cashgate. India recently spent 50 million on a space programme dispite receiving high levels of aid. Furthermore in many developing nations governments struggle to distribute aid effectively to those in need. This is because those most at need may be living in rural areas with little infrastructure, the lacks of roads or railways may make distributing aid challenging.
  2. There is a chance that developing countries will become aid dependent. This is where they do not actively try to improve living conditions in their nations as this would lead to aid revenues diminishing. Dambisa Moyo who is a public critic of the current aid situation argues in her book Dead Aid that aid needs to be only given for a set length of time and that it should gradually diminish over time.
  3. Aid can be tied this is where conditionalities are placed upon the aid making the LEDC do something in exchange for it receiving this aid. This could be requirements through PRSP that countries must begin ‘western style democracy’, privatise industries or remove subsidies (eg. South Sudan petrol and wheat). The Pergau Dam in Malaysia was only supported by the UK government in exchange for Malaysia taking out an arms contract with a british firm. Some conditionalities have included the removal of protectionist policies to allow free trade to occur despite both the EU and US having large external tariffs. Aid further supports neocolonial ideas that the west still truly controls Africa.
  4. Malawi was refused aid through the HIPC scheme as they increased spending during a famine. This conditionality may lead governments to take incorrect actions leading to deteriorating living conditions for citizens.
  5. Imports can flood the markets leading to domestic suppliers going out of business, due to a crowding out effect. For instance in malawi second hand clothing which has been donated by western NGOs is cheaper than domestically produced clothing. This leads to domestic businesses going out of business. When this aid stops the skills to produce clothing may not exist leading to a greater dependence on imports. Cotton is one of the top 5 cash crops in Malawi, if it cannot valorize it then it won’t reach further up the rostow stages of growth and will stay in the periphery of the Franks dependency model.

 

CASE STUDY: Aid case studies
Location/date Type of aid Reason(s) for aid Consequences of aid
2014, Malawi Second Hand Clothing Donated by NGOs from the developed world. -Ensure that people had suitable clothing at a low price allowing them to spend money on other things.

-Especially with item such as shoes, some citizens, predominantly women have to walk long distances to collect water.

-Local Malawian tailors have been put out of business by cheap second hand clothing from the developed world. They cannot compete on price or quality therefore putting them out of business resulting in higher unemployment and a net deficit in imports.
2013, Malawi Official Aid to the Malawian government from bilateral donors including the UK. £400 million a year -The official aid to the government was for government led long term development projects – Corruption led to a large amount of the aid going missing, it is referred to as the Cashgate Scandal as much of the money appears to have ended up being taken by civil servants. Furthermore, more recently, the malawian government have begun proceedings to purchase a private jet for the president.
Bangladesh Support from the NGO Pathfinders to fund community family planning workers who provide access to contraception. -Pathfinders say that 225 million women currently want access to contraception but lack access to it.

-Providing access to contraception to these populations lowers birth rate and consequently lowers the Infant Mortality Rate and increases the long term literacy rate.

-In Bangladesh the provision of community family planning workers has led to a fall in birth rate from 6 to 2 in 3 decades .

-Niger currently has a birth rate of 6 where religious tolerance and lack of access to contraception currently prevents it being effective we could see a drastic fall in population growth.

Pergau Dam, 1994 UK official top down aid donations to Malaysia -Aim of the project was to increases the availability of electricity to both businesses and domestic customers. This was through hydroelectric means. -This led in controversy when it was leaked that the aid had only been given in exchange for a large purchase of British arms from the Malaysians.

Benefits of Trade:

 

  1. Trade between a developing country and a developed country could be achieved through comparative advantage. Both produce the goods that they are best suited at with their factor endowments and then they trade at a mutually beneficial rate so they are are both better off.
  2. Trade means that the economy is not dependent on other nations and therefore can carry out policies it sees as important.
  3. Growing use of technologies means that many farmers can protect their crops and other goods from natural disaster. Microinsurance is a new trend where banks are willing to insure crops in case a natural disaster leads to famine. This may make businesses more confident to take on more employees and expand.
  4. Where education may not be widespread, trade can help train employees to carry out roles. This may require teaching them basic skills such as counting and writing. A more educated workforce has a number of social and economic benefits.

 

Problems Associated with Trade:

 

  1. Trade can be hampered by tariffs and quotas. Manufactured goods face higher tariffs on entering the EU than agricultural goods meaning that many developing countries cannot industrialise by valorising goods. However the EU’s Everything But Arms directive means that Least Developed Nations can trade freely with the EU on all goods except arms, this does mean that a country may valorise a good begin trading, therefore develop and increase per capita income leading to it no longer being able to trade with the EU at a competitive rate, possibly leading to economic contraction.
  2. Many products are bought by large TNCs, many have monopoly power over the buying of the good. This means that the TNC may dictate the price and leave farmers with little profit to survive with. An example of this is Coffee in Ethiopia, the price is set in London and New York. Fair Trade aims to prevent this by giving farmers a minimum guaranteed price.
  3. Many countries lack the infrastructure for trade to occur successfully. Furthermore many developing nations suffer from a savings gap this is where citizens do not earn enough to save meaning that institutions such as banks struggle to lend to businesses meaning they can’t invest in more productive equipment and new factories.  
  4. Track may lead to developing economies being stuck in the periphery of Frank’s Dependency Theory.