Global Aid For Development Is A Chimera, It Brings NO Substantial Change

Fall
1012
NationalEconomicPlanningGlobalView
Global Aid for Development is a CHIMERA, it brings NO substantial change
Research Project by:
DixitaPorwal(22) PratikGandhi(41) RajwinPatel(48) SagarAgrawal(52) SnehaChandan(59)
TEAM - BLACK SWAN

Expect the improbable
GlobalAidforDevelopmentisaChimera.ItbringsNoSubstantialChange 2
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.
INTERNATIONALINSTITUTEOFPLANNINGANDMANAGEMENT
Table Of Content
S.No 1 Topic Abstract Objective of study Introduction to the research 2 Critical View Where does AID Go? Structural Adjustment Program - SAP 3 Role of International Organizations in Global Economy for Global Aid 05 06 07 04 Page No.
4 IMF Conditions - Criticisms 5 6 7 WEST being the influencing factor in WB & IMF Analysis & Recommendation Bibliography
09 11 17 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 countrys 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 Banks 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 IMFs currency. Although that is useful shorthand, the SDR is not, in fact, a currency, but rather the IMFs 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 worlds 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.
FewoftheInternationalOrganizationsare:
AfricanDevelopmentBankAsianDevelopmentBank AssociationofSoutheastAsianNations BankforInternationalSettlements FoodandAgricultureOrganizationoftheUnitedNations(FAO) InterAmericanDevelopmentBank(IADB) InternationalLabourOrganization(ILO) InternationalMonetaryFund(IMF) OrganisationforEconomicCooperationandDevelopment(OECD) OrganisationforEconomicCooperationandDevelopment(OECD)WashingtonCenter OrganizationforSecurityandCooperationinEurope(OSCE) OrganizationofAmericanStates(OAS) UnitedNations UnitedNationsConferenceonTradeandDevelopment(UNCTAD) UnitedNationsDevelopmentProgramme(UNDP) UnitedNationsEnvironmentProgramme UnitedNationsPopulationFund(UNFPA) UnitedNationsEducational,ScientificandCulturalOrganization(UNESCO WorldBank WorldBankPublications WorldBankWorldDevelopmentSources WorldHealthOrganization(WHO) WorldTradeOrganizations(WTO)
IMF Conditions - Criticisms

IMF conditionalities may additionally result in the loss of a states 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 Bankfunded construction of hydroelectric dams in various countries has resulted in the displacement of indigenous peoples of the area. The World Banks 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 Banks 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 Banks 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 Banks 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 countriesthe G7because they represent the largest donors without much consultation with poor and developing countries.
WEST being the influencing factor in WB & IMF

Europes grip on the appointment of the IMFs managing director. The head of the funds 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 sayingIn 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 IMFs 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. 1 2 3 4 5 6 Member United States Japan Germany France China India SDR allocations (Million) 42122.4 15628.5 14565.5 10738.5 9525.9 5821.5 98402.3 7 8 9 10 Zimbabwe Argentina Bangladesh Bhutan 353.4 2117.1 533.3 6.3 3010.1 Voting Rights (%) 16.17 5.82 5.68 4.7 3.55 1.84 37.76 0.18 9.5 0.26 0.03 9.97
Total (187) Difference
237073.9 138671.6
100 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 lions share of existing IMF quotas.
(SOURCE: ECONOMIST.COM)
INFLUENCE ON INTERNAL WORKING OF THESE FINANCIAL INSTITUTIONS

The last proposed, the IMFs 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% supportand America, with nearly 17% of the votes in the IMF, never approved it.
(SOURCE: ECONOMIST.COM)
CASE STUDY - AFRICAS 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 funds 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 countrys 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 centralbank 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 Europes grip on the appointment of the IMFs managing director. (The head of the funds 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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Global Aid For Development Is A Chimera, It Brings NO Substantial Change

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Fall

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

Research Project by:

DixitaPorwal(22) PratikGandhi(41) RajwinPatel(48) SagarAgrawal(52) SnehaChandan(59)

TEAM - BLACK SWAN

Introduction to the Research

Where AID actually goes?

SAP Structural Adjustment Program

Role of International Organizations in Global Economy for Global Aid

IMF Conditions - Criticisms

WEST being the influencing factor in WB & IMF

Bailouts US Centric Approach Few selected countries are assistance.

SDR Allocations and Voting Rights

Total (187) Difference

INFLUENCE ON INTERNAL WORKING OF THESE FINANCIAL INSTITUTIONS

CASE STUDY - AFRICAS SLOW-DOWN

Benign Intervention - can have damning consequences.

Analysis and Recommendation

Hub and Spoke Model

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