What is overseas aid?

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 OVERSEAS AID

Overseas development aid, also known as foreign aid, is

money or technical assistance given by one country to
another to promote economic and social development. The
goal of foreign aid is to reduce poverty, improve living
conditions, and promote sustainable development in
developing countries. It can take many forms, including
grants, loans, technical assistance, and in-kind
contributions. Foreign aid is often funded by governments,
international organizations, and private foundations.

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

Can you name two of the
leading international aid
agencies?
 Main Aid Agencies

• United Nations Children's Fund (UNICEF)

• World Food Programme (WFP)
• World Health Organization (WHO)
• Oxfam / Save the Children
• Médecins Sans Frontières (MSF)
• International Rescue Committee (IRC)
• CARE International
• Action Against Hunger (AAH)
 LARGEST AID DONORS AS A % OF GNI IN 2021
0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2%
Saudi Arabia 1.05%
0.99%
Turkey 0.96%
0.93%
Sweden 0.91%
0.76%
Denmark 0.71%
0.52%
France 0.51%
0.5%
United Kingdom 0.5%
0.47%
Belgium 0.43%
0.4%
Malta 0.34%

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 COUNTRIES WITH HIGHEST POVERTY RATES (2019)
0% 10% 20% 30% 40% 50% 60% 70% 80%
Somalia (2017) 70.7%
Malawi (2019) 70.1%
South Sudan (2016) 67.3%
Mozambique (2014) 64.6%
Zambia (2015) 61.4%
Rwanda (2016) 52%
Niger (2018) 50.6%
Tanzania (2018) 44.9%
Uganda (2019) 42.2%
Zimbabwe (2019) 39.8%
Eswatini (2016) 36.1%
Lesotho (2017) 32.4%
Angola (2018) 31.1%
Chad (2018) 30.9%
Nigeria (2018) 30.9%

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 NUMBERS OF HUNGRY / MALNOURISHED PEOPLE
900
834
816.7 828.5 823.1
798.9
800
756
735.1
712.9 702.7
Number of starving people worldwide in millions

700 684.8
650.7 643.5
620.6
590.7 580.5 575.6 581.8 582.4 583 594.1
600 577

500

400

300

200

100

0
2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013- 2014- 2015- 2016- 2017- 2018- 2019- 2021/
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 23

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 PREVALENCE OF MALNOURISHMENT GLOBALLY
14%
12.1%
12%
Share of undernourished people

10% 9.3% 9.2%

8.6% 8.9%
7.9% 7.8% 7.6% 7.9%
8% 7.5%

6%

4%

2%

0%
2005 2010 2015 2016 2017 2018 2019 2020* 2021* 2022*

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

What are the different
types of overseas aid?
 DIFFERENT TYPES OF OVERSEAS DEVELOPMENT AID

• Project aid: Financing projects for a donor such as irrigation systems, hospitals
• Technical assistance: Funding of expertise such as engineers, medics
• Humanitarian aid: Emergency disaster relief, food aid, refugee relief and
disaster preparedness
• Soft loans: A loan made on a concessionary basis such as China - Africa
• Tied aid: Projects tied to suppliers in donor country
• Debt relief: This can include cancellation, rescheduling, refinancing of a
country’s external debts

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 SOFT LOANS

• Soft loans are loans with lower interest rates and more flexible repayment terms than
traditional loans.
• They are often provided by international financial institutions, such as the World Bank
and the International Monetary Fund (IMF), as well as by bilateral aid agencies, such
as USAID and the UK's Department for International Development (DFID).
• The goal of soft loans is to provide financial assistance to developing countries that
may not have access to traditional financing options. Soft loans often have longer
repayment periods and grace periods and may also come with technical assistance
and other forms of support.
• They are often used to support infrastructure projects, improve healthcare systems,
and promote economic development in general.

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 TIED LOANS

• Tied loans, also known as tied aid, are loans that are given on the condition
that the recipient must purchase goods or services from the lender or from a
designated group of suppliers.
• For example, a country may provide a loan to a developing country, but the
loan agreement may require that the developing country use the loan to
purchase goods or services from companies in the lending country.
• The idea behind tied loans is that they can promote trade and investment, but
critics argue that they can limit the recipient country's ability to choose the
best suppliers and can reduce competition, leading to higher prices and lower
quality goods and services.

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 What has been the UK’s
statutory overseas aid
target commitment?

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 What has been the UK’s statutory
overseas aid target commitment?
In 2015, the Coalition Government enshrined in law the
commitment to provide 0.7 per cent of GNI as ODA. The
UK met this target each year since 2013 - one of only five
countries to meet the target in 2019.

In November 2020, the Government announced that it

would allocate 0.5% of Gross National Income (GNI) for
Official Development Assistance (ODA) for 2021-22

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 UK GOVERNMENT SPENDING ON FOREIGN AID
10
9.45
9.13
9 8.54 8.73 8.61 8.55
8.17
Expenditure in billion £ (in nominal terms)

8 7.59

6 5.68 5.51 5.61 5.72

5.13
5 4.86

0
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 What are the main
justifications for countries
offering overseas aid?

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 ECONOMIC JUSTIFICATIONS FOR OVERSEAS AID

• Helps to overcome the savings gap and foreign currency gap

• Overseas aid can play a role in stabilizing post-conflict environments and in
disaster recovery
• Project aid can fast-forward investment in critical infrastructure – eventually
leading to higher productivity
• Long-term aid for health and education projects - builds human capital and
stronger social institutions.
• Targeted aid that lifts trend growth rate of poorest countries benefits donor
countries as external trade grows

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 What are some of the
main drawbacks /
criticisms of high levels of
overseas aid?

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 CRITICISMS / DRAWBACKS OF OVERSEAS AID

• Poor governance - aid might leave the recipient country. It can finance
corruption by ruling political elites and reinforce their power
• Lack of transparency – hundreds of $m is spent each year on aid consultants
and high-income country non-governmental organisations
• Dependency culture – heavy reliance on overseas aid might harm an
entrepreneurial culture. Most aid is “tied” to the donor country in some shape
or form
• Aid may lead to a distortion of market forces and a loss of economic efficiency
and might also cause higher rates of inflation

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 DAMBISA MOYO – DEAD AID

• Dependency on Aid: Instead of promoting self-sufficiency and economic growth, aid can
lead to reliance on external funding, hindering the development of sustainable economic
systems.
• Inefficiency and Corruption: Moyo argues that a significant portion of aid money is lost to
bureaucratic waste and mismanagement, and that it can perpetuate corruption within
recipient governments.
• Distorted Incentives: Foreign aid, according to Moyo, distorts incentives for governments
in recipient countries. Leaders may be less accountable to their citizens and more focused
on pleasing donors, potentially leading to poor governance.
• Crowding Out Local Investment: Moyo suggests that aid can crowd out local investment
and entrepreneurial initiatives by providing an easy source of income for governments.
This can hinder the development of domestic industries and private sector growth.

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 BANERJEE & DUFLO – AID (IN “POOR ECONOMICS”)

• Context Matters: Duflo argues that the effectiveness of overseas aid depends on the
specific context and the nature of the interventions. There is no one-size-fits-all solution,
and aid programs should be tailored to the unique challenges and needs of each region or
community.
• Rigorous Evaluation: Duflo emphasizes the importance of evidence-based policy and
rigorous evaluation of aid programs. Randomized controlled trials (RCTs) are highlighted as
a valuable tool to assess the impact of aid interventions, enabling policymakers to learn
what works and what doesn't.
• Targeted Interventions: Rather than advocating for blanket aid, Duflo suggests that aid
should be targeted at specific problems and areas. For example, interventions might focus
on improving healthcare, education, or access to financial services, addressing the most
pressing needs of the poor.

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 WILLIAM EASTERLY’S CRITICISMS OF OVERSEAS AID

• Skepticism of Centralized Planning: Easterly is critical of large, top-down

development programmes and centralized planning. He argues that such
approaches often lack the flexibility and local knowledge required to address
the diverse and complex needs of poor communities.
• Local Solutions: Easterly advocates for more attention to local, context-specific
solutions. He believes that local knowledge and bottom-up approaches are
more likely to lead to successful development outcomes.
• The Role of Markets: Easterly is supportive of market-based approaches and
the importance of entrepreneurship in driving economic growth and
development. He sees the private sector as a critical player in poverty
reduction.

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 What are cash transfers?

AID & DEVELOPMENT TUTOR2U.NET/ECONOMICS

 WHAT ARE CASH TRANSFERS?

Cash transfers are a type of social protection

programme in low-income countries that provide
direct financial assistance to vulnerable
households. Cash transfers generally involve
providing a set amount of money per month in a
local currency or in $s to eligible households.

CASH TRANSFERS TUTOR2U.NET/ECONOMICS

 CONDITIONAL & UNCONDITIONAL TRANSFERS
• Conditional cash transfers (CCT) require that the
recipients meet certain criteria, such as sending their
children to school or attending health checkups and
having children immunized
• Unconditional cash transfers (UCT) are provided
without any such requirements. They are provided
universally.

CASH TRANSFERS TUTOR2U.NET/ECONOMICS

 REAL WORLD EXAMPLES OF PROGRAMMES
• Brazil: The Bolsa Familia programme provides financial assistance
to over 13 million families in poverty. Families must ensure that
their children attend school and receive regular health check-ups to
receive the cash transfers. Studies have shown that the programme
has had a significant impact on reducing poverty and improving
health outcomes.
• A study conducted in 2016 found that the Bolsa Familia programme
reduced extreme poverty rates by 25%, and child mortality rates
among beneficiary families were 19% lower than among non-
beneficiary families.

CASH TRANSFERS TUTOR2U.NET/ECONOMICS

 REAL WORLD EXAMPLES OF PROGRAMMES
• Kenya: In Kenya, the government implemented the Hunger
Safety Net Programme (HSNP) in 2011 to aid households
in the arid and semi-arid areas of the country. The program
is unconditional.
• A study conducted in 2018 found that the programme
reduced absolute poverty rates by 7.5%, and increased
school attendance rates by 11% among beneficiary
households.

CASH TRANSFERS TUTOR2U.NET/ECONOMICS

 ARGUMENTS SUPPORTING CASH TRANSFERS
1. Reducing poverty and inequality: Direct cash transfers provide a direct and effective way
of reducing poverty and inequality by giving money to people who need it the most. This
improves living standards of low-income households and might reduce the Gini
coefficient. It might also reduce the scale of labour migration / possible brain drains.
2. Empowerment: Direct cash transfers empower individuals by giving them the freedom to
spend the money as they see fit. By providing a reliable and predictable source of income,
cash transfers help households to plan and make investment in their own human capital.
It can keep kids in school for longer. It can improve mental health outcomes.
3. Stimulating local economies: Direct cash transfers can stimulate local economies by
increasing demand. This can lead to increased economic activity and formal job creation,
especially in areas where there is high unemployment and under-employment
4. Cost-effectiveness: Cash transfers may be less expensive to administer than in-kind
transfers (such as food or clothing), which can be more difficult to distribute and monitor.

CASH TRANSFERS TUTOR2U.NET/ECONOMICS

 Source: Economist, November 2019 Source: Financial Times, October 2015

CASH TRANSFERS TUTOR2U.NET/ECONOMICS

 RESEARCH GOLD

Impact of a Conditional Cash Transfer on AIDS Incidence, Hospitalizations and

Mortality in Brazil: A Nationwide Longitudinal Study
By tracking municipalities for 15 years (2004-18), the authors found that,
compared to municipalities with low cash coverage (less than 30% of target
population), areas with high Bolsa coverage (over 70% of target population)
reduced AIDS incidence between 4%-13%. As a result, AIDS-related
hospitalization declined by 16%-23% and AIDS-induced mortality dropped by
12%-15%.

Source: Jaramillo, Published in Public Finance Review, 2018

CASH TRANSFERS TUTOR2U.NET/ECONOMICS

 RESEARCH GOLD

The impact of a poverty reduction intervention on infant brain activity

This study demonstrates the causal impact of a poverty reduction intervention
on early childhood brain activity. Data from the Baby’s First Years study, a
randomized control trial, show that a predictable, monthly unconditional cash
transfer given to low-income families may have a causal impact on infant brain
activity. In the context of greater economic resources, children’s experiences
changed, and their brain activity adapted to those experiences. The resultant
brain activity patterns have been shown to be associated with the development
of subsequent cognitive skills.

Source: Sonya Troller Renfree, 2021

CASH TRANSFERS TUTOR2U.NET/ECONOMICS

 ESTHER DUFLO – POOR ECONOMICS
• Esther Duflo is co-founder and director of the Abdul Latif
Jameel Poverty Action Lab at the Massachusetts Institute of
Technology.
• She has conducted extensive research on cash transfer
programmes and their effectiveness in reducing poverty
• In India, she and her colleagues conducted a randomized
controlled trial of an UCT programme in which they provided
cash transfers to households living below the poverty line.
• They found that the programme had a positive impact on
both the short-term and long-term economic outcomes of
the beneficiaries, including increased consumption, savings,
and investments.

CASH TRANSFERS TUTOR2U.NET/ECONOMICS

 GIVE DIRECTLY – UNCONDITIONAL TRANSFERS
Give Directly is a nonprofit
organization that aims to
alleviate poverty by providing
direct cash transfers to
individuals living in extreme
poverty in developing
countries
Give Directly operates in DRC,
Kenya, Liberia, Malawi,
Mozambique, Morocco,
Nigeria, Rwanda, Uganda, US,
& Yemen

CASH TRANSFERS TUTOR2U.NET/ECONOMICS

 ARGUMENTS AGAINST DIRECT CASH TRANSFERS
1. Sustainability: Critics argue that direct cash transfers may not be sustainable in the
long run, as they do not address the root causes of poverty and inequality, such as
lack of access to education, health care, and employment opportunities.
2. Dependency: Some argue that direct cash transfers may create a culture of
dependency among recipients, perhaps discouraging them from seeking employment.
This might perpetuate the cycle of absolute poverty.
3. Inflation: Direct cash transfers may contribute to inflation by increasing demand for
goods and services such as food. If prices rise, the real purchasing power of transfers
may be eroded, reducing impact on poverty reduction
4. Corruption: There are concerns that direct cash transfers may be subject to
corruption, with government officials or others embezzling funds or diverting them to
politically connected individuals or groups.

CASH TRANSFERS TUTOR2U.NET/ECONOMICS

 EXAM GOLD

Much of the research on conditional and unconditional cash

transfers involves the use of randomised controlled trials. A
randomised controlled trial (RCT) is a type of scientific experiment
used to evaluate the effectiveness of a particular intervention or
treatment. In an RCT, participants are randomly assigned to either an
experimental group, which receives the intervention being tested, or
a control group, which does not receive the intervention. The groups
are then compared to determine the impact of the intervention on
the outcomes of interest. This is an important approach in policy.

CASH TRANSFERS TUTOR2U.NET/ECONOMICS