global aid for development is a chimera, it brings no substantial change

“Global Aid for Development is a CHIMERA, it brings NO substantial change”

TEAM - BLACK SWAN

“Expect the improbable”

Research Project by:

• Dixita Porwal (22) • Pratik Gandhi (41) • Rajwin Patel (48) • Sagar Agrawal (52) • Sneha Chandan (59)

National Economic Planning – Global View

Fall 10‐12

Global Aid for Development is a ‘Chimera’. It brings ‘No’ Substantial Change 2

I N T E R N A T I O N A L I N S T I T U T E O F P L A N N I N G A N D M A N A G E M E N T

Acknowledgement

We heartily thank our Project in-charge, Dr. Debajyoti Majumder (IIPM, Pune), whose

encouragement, guidance and support from the initial to the final level enabled us to

develop an understanding of the subject. We are grateful for him contribution towards

the execution of our project and feel fortunate enough to undergo a project on “Global

Aid for development being a chimera” on a very macro-level. It has brought the best in

us to analyze and research on such a project.

Lastly, we offer our regards and blessings to all of those who supported us in any

respect during the completion of the Research, which include Dr. Harnita Choudhary (Ex- EU delegate), Now a professor at SIMS who guided us through the part of getting

involved with the get the primary data for the Research.



Table Of Content S.No

Topic

Page No.

1

Abstract

Objective of study

Introduction to the research

04

2

Critical View

Where does AID Go?

05

Structural Adjustment Program - SAP

06

3

Role of International Organizations in Global Economy for Global Aid

07

4

IMF Conditions - Criticisms

09

5

WEST being the influencing factor in WB & IMF

11

6

Analysis & Recommendation

17

7

Bibliography

21



Abstract

National Economic Planning is all about the economic challenges faced by an economy

in order to sustain itself on the macro-level. Our research talks about the Global Issue of

Financial aid being a chimera and eventually bring no substantial change.

Objective of Study

The main objective of the study is to portray the critical issues on Global aid is been

conceptualized and structured. In the research, we have brought articles, points, cases

which tell us the story, which is true, and not how it is been shown in the media.

Introduction to the Research Global Aid (also known as international aid, overseas aid, or foreign aid) is a

voluntary transfer of resources from one country to another, given at least partly with the

objective of benefiting the recipient country.

Aid existed in ancient times. More recently, in the nineteenth century, some private aid

flowed from the Western countries to the rest of the world; missionary schools are an

example. In the nineteenth and early twentieth centuries, aid from governments was tiny

compared to present levels, consisting mostly of occasional humanitarian crisis relief.

Some transfers that would now be counted as aid, however, came under the purview of

colonial office budgets. It was at the end of World War Two, in the contexts of European

reconstruction, decolonization, and cold war rivalry for influence in the third world, that

aid became the major activity that it is today.

Aid may be "given" in the form of financial grants or loans, or in the form of materials,

labor, or expertise. Aid is often pledged at one point in time,

but disbursements (financial transfers) might not arrive until later.



Where AID actually goes?

It is true that aid is rarely given for motives of pure altruism. However, it is important to

look at where aid goes. For example, “only about one fifth of U.S. aid goes to countries

classified by the OECD as ‘least developed.’” This “pro-rich” trend is not unique to the

United States. According to Collier, “the middle income countries get aid because they

are of much more commercial and political interest than the tiny markets and

powerlessness of the bottom billion.” What this means is that, at the most basic level,

aid is not targeting the most extreme poverty.

The form of aid must also be considered. The World Bank, until recently, issued only

loans, meaning that the country must repay both the loan and the interest rates. In

contrast, the European Commission issues grants, which countries need not worry

about paying back. This means that “loans have been going to the poorest countries

and the grants to the middle-income countries.

Furthermore, consider the breakdown, where aid goes and for what purposes. In 2002,

total gross foreign aid to all developing countries was $76 billion. Dollars that do not

contribute to a country’s ability to support basic needs interventions are subtracted.

Subtract $6 billion for debt relief grants. Subtract $11 billion, which is the amount

developing countries paid to developed nations in that year in the form of loan

repayments. Next, subtract the aid given to middle income countries, $16 billion. The

remainder, $43 billion, is the amount that developing countries received in 2002. But

only $12 billion went to low-income countries ($15 billion for all developing countries) in

a form that could be deemed budget support for basic needs.

When aid is given to the Least Developed Countries who have good governments and

strategic plans for the aid, it is thought that it is more effective



SAP – Structural Adjustment Program A Major Cause of Poverty

Many developing nations are in debt and poverty partly due to the policies of

international institutions such as the International Monetary Fund (IMF) and the World

Bank.

Their programs have been heavily criticized for many years for resulting in poverty. In

addition, for developing or third world countries, there has been an increased

dependency on the richer nations. This is despite the IMF and World Bank’s claim that

they will reduce poverty

Following an ideology known as neo-liberalism, and spearheaded by these and other

institutions known as the “Washington Consensus” (for being based in Washington

D.C.), Structural Adjustment Policies (SAPs) have been imposed to ensure debt

repayment and economic restructuring. But the way it has happened has required poor

countries to reduce spending on things like health, education and development, while

debt repayment and other economic policies have been made the priority. In effect, the

IMF and World Bank have demanded that poor nations lower the standard of living of

their people.

SDR - SPECIAL Drawing Rights

SPECIAL Drawing Rights, or SDRs, are often referred to as the IMF’s currency.

Although that is useful shorthand, the SDR is not, in fact, a currency, but rather the

IMF’s unit of account. The value of an SDR is defined as the value of a fixed amount of

yen, dollars, pounds and euros, expressed in dollars at the current exchange rate. The

composition of the basket is altered every five years to reflect changes in the

importance of different currencies in the world’s trading system



Role of International Organizations in Global Economy for Global Aid

The participating countries define the function of the International Organizations. The

objective of international organization is to study, collect and propagate information,

setting up of laws that are internationally accepted. The international organizations also

help in cooperation between different countries by setting up negotiation deals between

them. The international Organizations also help in technical assistance.

The International Organizations play an important role in collecting statistical

information, analyzing the trends in the variables, making a comparative study and

disseminate the information to all other countries. There are some intergovernmental

organizations that have set international Minimum standards. Such norms are difficult to

be set at the state level.

There are some international organizations that perform certain supervisory functions.

The supervisory system of the UN is very weak. In contrast, the supervisory mechanism

of the ILO is quite strong. The European Union, together with the Commission and the

Court of Justice, has a relatively strong supervisory mechanism.

The third function of the international organizations is setting up multilateral or bilateral

agreements between countries.

Another function, that has assumed importance in the recent times, is lending out

technical cooperation to the member countries. By technical cooperation we mean the

provision of intellectual or financial material to the countries, which require them.

The multilateral agreements that are settled by the international organizations occur in

sections like environment protection, development trade, crime human rights, etc.



Few of the International Organizations are:

African Development Bank Asian Development Bank

Association of Southeast Asian Nations

Bank for International Settlements

Food and Agriculture Organization of the United Nations (FAO)

Inter‐American Development Bank (IADB)

International Labour Organization (ILO)

International Monetary Fund (IMF)

Organisation for Economic Co‐operation and Development (OECD)

Organisation for Economic Co‐operation and Development (OECD) Washington Center

Organization for Security and Co‐operation in Europe (OSCE)

Organization of American States (OAS)

United Nations

United Nations Conference on Trade and Development (UNCTAD)

United Nations Development Programme (UNDP)

United Nations Environment Programme

United Nations Population Fund (UNFPA)

United Nations Educational, Scientific and Cultural Organization (UNESCO

World Bank

World Bank Publications

World Bank ‐‐ World Development Sources

World Health Organization (WHO) World Trade Organizations (WTO)



IMF Conditions - Criticisms

IMF conditionalities may additionally result in the loss of a state’s authority to govern its

own economy, as national economic policies are predetermined under IMF packages.

Issues of representation are raised as a consequence of the shift in the regulation of

national economies from state governments to a Washington-based financial institution

in which most developing countries hold little voting power. IMF packages have also

been associated with negative social outcomes such as reduced investment in public

health and education.

With the World Bank, there are concerns about the types of development projects

funded. Many infrastructure projects financed by the World Bank Group have social and

environmental implications for the populations in the affected areas and criticism has

centered on the ethical issues of funding such projects. For example, World Bank-

funded construction of hydroelectric dams in various countries has resulted in the

displacement of indigenous peoples of the area.

The World Bank’s role in the global climate change finance architecture has also

caused much controversy. Civil society groups see the Bank as unfit for a role in climate

finance because of the conditionalities and advisory services usually attached to its

loans. The Bank’s undemocratic governance structure – which is dominated by

industrialized countries – its privileging of the private sector and the controversy over

the performance of World Bank-housed Climate Investment Funds have also been

subject to criticism in debates around this issue. Moreover, the Bank’s role as a central

player in climate change mitigation and adaptation efforts is in direct conflict with its

carbon-intensive lending portfolio and continuing financial support for heavily polluting

industries, which includes coal power.

There are also concerns that the World Bank working in partnership with the private

sector may undermine the role of the state as the primary provider of essential goods

and services, such as healthcare and education, resulting in the shortfall of such



services in countries badly in need of them. As an increasing shift from public to private

funding in development finance has been observed recently, the Bank’s private sector

lending arm – the International Finance Corporation (IFC) – has also been criticised for

its business model, the increasing use of financial intermediaries such as private equity

funds and funding of companies associated with tax havens.

Critics of the World Bank and the IMF are also apprehensive about the role of the

Bretton Woods institutions in shaping the development discourse through their

research, training and publishing activities. As the World Bank and the IMF are

regarded as experts in the field of financial regulation and economic development, their

views and prescriptions may undermine or eliminate alternative perspectives on

development.

There are also criticisms against the World Bank and IMF governance structures which

are dominated by industrialized countries. Decisions are made and policies

implemented by leading industrialized countries—the G7—because they represent the

largest donors without much consultation with poor and developing countries.



WEST being the influencing factor in WB & IMF Europe’s grip on the appointment of the IMF’s managing director. The head of the fund’s sister institution, the World Bank, is by

convention an American.

Global Reserve currency (SDR) Four major currencies:

o US Dollar o Japanese Yen o Pound Sterling o Euro

In the latest G20 summit, China and Russia have even talked about making it the issuer of a global reserve currency to replace the dollar therefore developing countries should have fair say in the voting n function of IMF and other financial institutions.

Largest capital subscription – Largest share of Quota in Financial Institutions • EG- Belgium has 1.86 %has more voting rights in IMF than Brazil 1.72 % and

India 1.82 %. • European countries have more than 30% of the votes and America have

nearly 17%.

Bailouts – US Centric Approach – Few selected countries are assistance.

Crisis eg : Recession in US had hit the world Economy.

• The growth in the world economy will come from outside the rich world .

eg: During the Recession Growth only came from the Developing countries like India & China than that of Developed countries like US.

“It used to be said that if the United States sneezed, the World Economy caught the flu”



Quoted them saying…In support to ‘WEST’ being the influencing factor in WB & IMF !

“The main emerging markets are going to remain wary of relying on the IMF for

emergency financial support until they are convinced that the leopard has really

changed its spots.”

- Eswar Prasad, a former head of the IMF’s China Unit.

Emerging economies do not trust the IMF because they do not think they have enough

say in it. Rich countries, which have the bulk of power within the institution, do not take

it seriously. And the fund, ever aware of who holds the purse strings, is “excessively

hesitant in talking to rich countries about faults in their policies.

- Raghuram Rajan, a former Chief Economist of the IMF and a professor at the University of Chicago Booth School of Business



SDR Allocations and Voting Rights

Sr No. Member SDR allocations

(Million) Voting Rights

(%)

1 United States 42122.4 16.17

2 Japan 15628.5 5.82

3 Germany 14565.5 5.68

4 France 10738.5 4.7

5 China 9525.9 3.55

6 India 5821.5 1.84

98402.3 37.76

7 Zimbabwe 353.4 0.18

8 Argentina 2117.1 9.5

9 Bangladesh 533.3 0.26

10 Bhutan 6.3 0.03

3010.1 9.97

Total (187) 237073.9 100

Difference 138671.6 62.24

Source : IMF Official Website (Last Updated: April 28th, 2011) http://www.imf.org/external/np/fin/data/sdr_ir.aspx

• IMF has 187 Member Countries • Six countries are holding #7.&6% of voting rights , where as 181 countries are

just holding 62.24 % • European countries have more than 30% of the votes and America have nearly

17%.



G-20 Summit On April 2nd 2009 ,the G20 countries authorized the IMF to issue $250 billion in new

SDRs. The advantage of a fresh SDR issuance is that it immediately augments

countries’ foreign reserves without needing to be lent. However, this benefit comes with

a serious drawback.

Although the G20 portrayed the new SDRs as a quick way of channeling resources into

emerging economies, SDRs are in fact allocated in proportion to countries’ existing IMF

quotas .

This means that around $170 billion of the $250 billion of new SDRs that are to be

issued will land in the reserves of rich countries, because they have the lion’s share of

existing IMF quotas.

(SOURCE: ECONOMIST.COM)

INFLUENCE ON INTERNAL WORKING OF THESE FINANCIAL INSTITUTIONS

The last proposed, the IMF’s board approved SDR allocation, of $21.4 billion in 1997.

But although 131 countries with 78% of the total votes in the IMF accepted the proposal,

it was never put into effect.

Such decisions require 85% support—and America, with nearly 17% of the votes in the

IMF, never approved it.

(SOURCE: ECONOMIST.COM)



CASE STUDY - AFRICA’S SLOW-DOWN Why Foreign Aid Is Hurting Africa?

Money from rich countries has trapped many African nations in a cycle of corruption,

slower economic growth and poverty. Cutting off the flow would be far more beneficial,

says Dambisa Moyo.

Over the past 60 years at least $1 trillion of development-related aid has been

transferred from rich countries to Africa. Yet real per-capita income today is lower than it

was in the 1970s, and more than 50% of the population -- over 350 million people -- live

on less than a dollar a day

Dutch Disease-large inflows of money can kill off a country's export sector.

Then there is the issue of "Dutch disease," a term that describes how large inflows of

money can kill off a country's export sector, by driving up home prices and thus making

their goods too expensive for export. Aid has the same effect. Large dollar-denominated

aid windfalls that envelop fragile developing economies cause the domestic currency to

strengthen against foreign currencies. This is catastrophic for jobs in the poor country

where people's livelihoods depend on being relatively competitive in the global marke

Food Aid - flooding of foreign markets with American food

In a similar vein has been the approach to food aid, which historically has done little to

support African farmers. Under the auspices of the U.S. Food for Peace program, each

year millions of dollars are used to buy American-grown food that has to then be

shipped across oceans. One wonders how a system of flooding foreign markets with

American food, which puts local farmers out of business, actually helps better Africa. A

better strategy would be to use aid money to buy food from farmers within the country,

and then distribute that food to the local citizens in need.



Benign Intervention - can have damning consequences.

Even what may appear as a benign intervention on the surface can have damning

consequences. Say there is a mosquito-net maker in small-town Africa. Say he employs

10 people who together manufacture 500 nets a week. Typically, these 10 employees

support upward of 15 relatives each.

A Western government-inspired program generously supplies the affected region with

100,000 free mosquito nets. This promptly puts the mosquito net manufacturer out of

business, and now his 10 employees can no longer support their 150 dependents. In a

couple of years, most of the donated nets will be torn and useless, but now there is no

mosquito net maker to go to.

They'll have to get more aid. And African governments once again get to abdicate their

responsibilities.

• Provide Band-Aid Solutions - cannot be the platform for long-term sustainable

growth

Aid-supported scholarships have certainly helped send African girls to school (never

mind that they won't be able to find a job in their own countries once they have

graduated). This kind of aid can provide band-aid solutions to alleviate immediate

suffering, but by its very nature cannot be the platform for long-term sustainable growth.

(SOURCE : http://online.wsj.com )



Analysis and Recommendation

Customized Outlook

Every country in the world has a different political system and hence it becomes essential for a customize governance for the recipient country who is getting Aid.

Open, Transparent, and Merit-Based Selection Process

The heads and senior leadership of the international financial institutions should be appointed through an open, transparent, and merit-based selection process

Quotas could be adjusted to the realities of the global economy

Larger shares of the votes for big emerging economies will mean smaller shares for rich ones. Without such a shift or some creative thinking, it is hard to see the fund winning more legitimacy among emerging economies.

Its recommended a cut in the percentage of votes needed for the fund’s most important decisions from 85% to 70-75%. The existing threshold amounts to a veto for America, with its 17% share. Reducing it to 70% would have removed another source of emerging-country discomfort.

Even quota reform, hard though it is, need not be impossible. An innovative idea about how quotas could be adjusted to the realities of the global economy. He suggests shrinking all existing quotas by 20%, so that a country that at the moment has 10% of the votes would have 8%. Then the 20% of quotas freed up could be auctioned, with an upper limit (say 14.9%) on any country’s share. In effect, this would give more voice in the IMF to those who want it most, giving them a greater stake in its success.

Create a Supervisory IMF council consisting of finance ministers and central-bank governors

Finance ministers of each member country should play a role in the decision making of IMF as it specializes the concept of better economic attributes.



Transparency in Aid – Formation of a Committee

Committees, which can scrutinize, legitimate and validate all the processes happenings in IMF, World Bank and other institutes should be put forward.

One idea, which would be relatively easy to put into practice, would be to loosen Europe’s grip on the appointment of the IMF’s managing director. (The head of the fund’s sister institution, the World Bank, is by convention an American.)

Nevertheless, there is still a long way to go before the fund becomes an institution that is both trusted by the emerging world and respected by the rich, and is therefore a venue for effective multilateral financial co-operation.

Key Enlightenments:

• Global Inclusive Growth should be implied

• Global Aid should bring development, not corruption

• Aid works when we work together

• Aid for humanity should be honest and true, just as god

The concept of humanitarianism and altruism should be employed so as to make aid

more conducive and effective. We need leaders such as Mahatma Gandhi, Martin

Luther King, Mother Teresa and Abraham Lincoln

And hence we pledge to make that change.



Business Model:

Hub and Spoke Model The hub-and-spoke distribution paradigm (or model or network) is a system of

connections arranged like a chariot wheel, in which all traffic moves along

spokes connected to the hub at the center.

We will apply this model in the making of a Transparency committee of IMF and World

Bank and eventually making the bigger institutes as Hubs and regional and local

institutes as spokes. Spokes are simple, and new ones can be created easily.



S - Sufficient in scale to achieve its intended goals

M - Measurable so taxpayers and recipients can see results and monitor

progress over time

A - Accountable to the citizens of developing nations

R - Responsive to the specific needs of the citizens for whom it is intended

T - Transparent, to allow scrutiny by civil society and the media



Bibliography

Websites

www.Imf.org

www.abc.news.com

www.eurodad.org

www.usaid.org

www.econ.yu.edu

http://www.economist.com/

www.nepiipmdelhi.blogspot.com

www.imf.org/external/data.htm

http://online.wsj.com

http://www.imf.org/external/np/fin/data/sdr_ir.aspx

Books

International business – Francis Cherunilam

Foreign exchange management – C.V Jeevanandam

International Economics – M.L Jhingan

global aid for development is a chimera, it brings no substantial change

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