Relationship between Countries at different levels of development

Question 1

aid

Answer 1

assistance given to other countries on favorable terms

Question 2

tied aid

Answer 2

aid with conditions attached

Question 3

untied aid

Answer 3

aid without conditions attached

Question 4

bilateral aid

Answer 4

aid given by one country to another country

Question 5

multilateral aid

Answer 5

aid given by international organisations to a country or countries

Question 6

What are the reasons for giving aid?

Answer 6

Tied, Bilateral aid can be given to to promote the industries of the donor country. It may require the country getting the aid to buy products from an infant industry that the donor country is trying to grow. It may insist that the country spend on donor’s products even if better quality products are available.

Tied aid increases the demand for the donor country’s exports, but untied aid may also be given in the hope of increasing the donor country’s exports. If aid does improve the recipient country’s economic growth. It is likely that the recipient country would be more likely to buy more imports.

A motive behind bilateral aid might be to gain political influence. A recipient country may be more likely to support the donor country against disputes with other countries. (Pakistan and China, good example)

Another use of multilateral or bilateral aid may be to influence the economic policies of the recipient government. They may give aid in the hopes that they use this to stop the country from using child labor.

Question 7

virtuous cycle

Answer 7

The links between an increase in investment, an increase in productivity, an increase in income, and an increase in savings.

Question 8

What are the effects and importance of aid

Answer 8

Effects:
Aid can help the recipient country to experience increases in its income per head and development. Aid can provide the investment, or the finance, for education, healthcare and new industries that the recipient country may be lacking.

This is one of the disadvantages of aid. Low income and middle income country sometimes end up spending more on interest payments on aid compared to the aid that they receive from the country.

IMPORTANCE:
Aid provides an opportunity for countries to solve the problem of having a lack of financial institutions and lack of savings to channel those savings that do exist from lenders to entrepreneurs wanting to establish new firms and to expand the output of existing firms.

Question 9

Why do low and middle income countries prefer trade rather than aid?

Answer 9

Fair international trade can act as an engine for growth. It improves supply conditions and lowers costs, leading to more efficient production:
- Economies of scale become possible because of the larger market.
- The increased competition encourages domestic entrepreneurs to innovate and look for new techniques of production.
- There can be information traded from high-income countries to low middle-income economies. Transfer of skills.
- Specialization and trade increase incomes which increase savings that can be used for investment.

Question 10

Why do Low-income and middle-income countries that specialize in primary products at a disadvantage

Answer 10

This is because the price of these goods is significantly lower compared to high-income countries that produce manufactured or service based goods.
The reason the price has decreased is because:

• The income elasticity of demand for primary products is low so that, as world incomes have risen, there has been little extra demand for primary goods. The demand has shifted to manufactured goods.
• Producers of manufactured goods in high-income economies have an element of monopoly power, which they have used to maintain high prices.
• Subsidies provided to farmers in the USA and Europe put downward pressure on global agricultural prices. For instance, it is claimed that US subsidies given to its cotton farmers an unfair competitive advantage,

Overall, this can be solved to an extent by import substitution policies and attempting to diversify economies. As the secondary sector is becoming more important and countries are starting to gain comparative advantages over other high income economies.

Question 11

Why do countries go into debt?

Answer 11

• They have a structural current account deficit
• The country may have been very overconfident in the value of loans
• Funds are not used well
• Unexpected events occur like supply shock and demand shocks

A high level of external debt can make it difficult and expensive for low-income and middle-income countries to attract more funds for development.

Question 12

What are the aims of the IMF?

Answer 12

• To promote international monetary cooperation
• To facilitate the expansion and balanced growth of international trade
• To promote exchange rate stability
• To assist in setting up a multilateral system of payments
• To make resources available(with adequate safeguards) to members experiencing balance of payments difficulties.