Trade versus Aid

Intro:

- be aware that the issue is controversial

• many argue one or the other is more important in development of a country
• both equally important
• South Korea relied on trade-led growth
• Burkina Faso and other African LDCs relied primarily on aid
• Bangladesh is an example of a country which bridges the gap between the two

Trade:

- often favoured due to example set by Asian Tigers
- South Korea an example of a country implementing trade-led growth

• opening markets to international trade = rapid growth and industrialisation
• strong manufacturing sector whose production was cheap and able to expand through FDI
• able to flood export markets with cheap products whilst other countries were in recession
• attracted interest of TNCs

- aid not much of a success in South Korea

• aid from USA after Korean War
• contributed to huge amount of GDP - 18.5%, but economy still struggled
• wasn't until development of manufacturing sector that SK properly industrialised

- trade has a long-term impact on international cooperation, especially in trade blocs e.g. NAFTA and EU

• due to creation of NAFTA, Mexico became one of the largest recipients of FDI among emerging markets, receiving $156 billion
• Europe combined is able to trade more efficiently with the rest of the world and is more efficient than 28 countries competing with each other
• EU grown from much more than a means for trade, but also towards social, environmental and political cooperation
• Romania's economy has grown by 7% since the country asked to join the EU

- however, trade is much more dependent on export markets and other countries' economies

• e.g. East Asian Financial Crisis
• Asian economies started to fail in 1997
• confidence in Asian markets fell and TNCs and other investors withdrew their money
• Japanese recession in same decade meant that export markets shrank

- future competition with growing economies could hinder Asian Tiger economic growth as TNCs look towards RICs

• cheaper workforce = cheaper products = more efficient production
• NICs have to base their 2ry industry on more high quality goods to retain TNC and consumer interest
• although products, e.g. electrical goods, sell for more money they require more specialist machinery and higher skilled workforce (education up for country-?) = more expensive to make

Aid:

- can be both economically and environmentally sustainable - NGOs' influence in Burkina Faso

• 80% of country live rurally --> depend on agriculture
• desertification and increasingly frequent droughts caused crops to fail due to lack of moisture in soil
• huge number of people in poverty (>36% below poverty line)
• due to food insecurity people have little alternative for income

        'bottom-up' charity approaches, e.g. Tree Aid(!) improving food security and thus level of development

• NGO works in Sahel Region with local communities - 'pro-poor growth'
• planting trees through forestry schemes and teaching people about more sustainable agriculture and food security
• trees provide food sold to get income (Tamarind Tree - pod-like fruit sold to restaurants globally) --> children to shl etc. -->literacy rate up + skilled workers in future
• women entrepreneurs more involved in local community as leaders and having active roles regarding future of forests

- too dependent on international aid

• e.g. Tanzania and Botswana during economic crisis in 80s and 90s
• still continue to rely on aid to make up annual budget rather than independently fund economic growth
• mainly confined to LDCs with inadequate infrastructure and less skilled workers to produce more than raw materials to sell

Trade and Aid:

- Bangladesh example of a country which has been equally dependent on trade and aid - reinforces idea that the two must co-exist

• balance for each = vital for agricultural sector
• without aid helping farmers develop sustainable farming methods and introduction of fertiliser etc., agricultural workers won't get more profit from traded goods - production not efficient
• aid won't be influential if country hasn't established markets to sell produce to
• UK enabled >100,000 farmers to gain improved access to markets - strategy involves both aid and trade

- textile industry is country's main export and considerable source of income --> argued trade more important

• though low pay and poor working conditions = trade doesn't always ensure country's development has reached the individual
• external aid may be required to improve working conditions and pressurise industries to increase minimum wage
• likewise, 'top-down' aid doesn't always find its way to communities - esp. with corrupt government

Conclusion:

- both equally important

• although trade = more long-term
• aid = short-term
• factors inhibiting path to development often come from country itself - poor infrastructure and education - can be resolved with aid and allowing country to pursue export-led growth
• aid may thus be a way to initiate growth and trade to sustain it
• 'bottom-up' aid strategies more effective than 'top-down'
• similarly trade must be able to support the individual too

Critically evaluate the case for granting debt relief to LDCs (10 marks)

Intro:
- Heavily Indebted Poor Countries scheme established to reduce debt in LDCs
- Multilateral Debt Relief Initiative launched in 2005 to grant 100% relief to 35 eligible countries
- The argument for granting debt relief is controversial:

• relieve poorest countries of financial difficulties --> can develop economically
• effect on other countries-? sceptical
• how well will it actually benefit the country-? Different areas of society-?

Debt relief largely beneficial to receiving country:

• money saved  by not paying back loans --> investing more money into healthcare --> life expectancy and infant mortality rates will improve --> country = healthier
• no debt = government can plan its expenditures better
• government in Guyana decided to promote free healthcare after debt re-structured - population's low income meant they couldn't afford private healthcare
• reduced interest payments by $60 million a year allowed Guyana to increase social spending by >25% --> now over 20% of GDP is spent on health, education, housing, water and sanitation
• now more likely to reach MDGs --> increase in spending on education means that more children will be in primary education ('achieve universal primary education')

Countries able to combat growing numbers in poverty: another MDG making progress as a result

• in response to HIPC scheme - poverty reduced in Uganda from 51% in 1992 to 35% in 2000
• although poverty starting to rise again - 38% in 2002
• suggests that impact from debt relief only short term

No guarantee that country will improve its economic management

• countries may contract further debt with the belief they will also be forgiven
• Ethiopia - debt almost back at 'pre-MDRI' levels
• Ghana - used advantage of debt reductions to take out more loans at interest rates 10x higher than leading providers

Concerns that money gained will go straight to government and not reach the poor, or money used to enhance wealth and spending ability of the rich and not trickle down to the poor

• disproved by Uganda - building better roads that benefit agricultural workers --> farmers with small incomes can bring produce directly to markets - generates more income - improves welfare of people
• pressure from MEDCs to meet criteria for MDRI force them into more stable government

Disadvantages other countries:

• system only benefits LDCs who are in debt --> encourages other LEDCs to over-spend so they get debt relief in the future
• 35 countries had their debt wiped - 'lenders' do not get their money back

Conclusion:

• more advantageous to receiving countries
• certain areas of society benefitted more than others
• agreement disadvantages other countries
• although it allows LDCs to develop country as opposed to using GDP to pay off debt --> more sustainably developed in the future