Question 13: Moyo
Democracy and Growth
- Democracy bleeds into economics: Property Rights, check and balances, defends press and feedback loops, and ensures contracts. -Creates a peace dividend and decreases revolutions as the poor have access to economic opportunities- fewer revolutions -More equitable and transparent economic policies -But democracy at the early stages of development are irrelevant and harmful to growth. HIGH QUALITY INSTITUTIONS ARE MORE IMPORTANT IN THE INITIAL STAGES OF GROWTH, and these can be created under a good dictatorship.
Why does aid go to corrupt countries?
1- Pressure to lend: livelihoods of the people working in aid organizations means that lending is necessary to the wellbeing of those in power. Success is measured by the size of the portfolio. They must use the money in a given year in order to get more money later. 2- difficult to decide which countries are "corrupt" and which are not
Micro-Macro Paradox (short term/long term benefits)
A seemingly positive intervention can be beneficial in the short run, and detrimental in the long run (i.e. mosquito nets). Thus, aid should be measured in the long term.
Aid and Savings
As foreign money comes in, savings goes down. Fungible aid goes towards conspicuous consumption.
Aid and the Export Sector
Dutch Disease. Aid dollars are converted into local currency which makes their exchange rate more expensive on the international market. Goods are less competitive.
Aid dependency
Encourages laziness by decreasing incentives. No reason to look for solutions to long term development. Degrades tax collection infrastructure. Encourages the support of useless public sector projects.
Aid and Civil Society
Foreign aid cuts off feedback loops as taxes from the middle class no longer ensure government responsiveness.
Aid and Social Capital
Foreign aid weakens the trust of social capital that keeps businesses, economy and political life together. Encourages rent-seeking behaviors rather than innovation. No reason for trust.
Aid and Investment
Investment goes down as less is saved. Private investors are uncomfortable sending money to aid dependent countries. Private capital falls and so aid becomes even more necessary.
Fungible Aid
Money set aside for one purpose are diverted to another. It reduces public spending as this money is used in the place of tax money and tax money is diverted to useless purposes.
Aid and Inflation
More money chasing fewer goods leads to high interest rates. Aid leads to increased demand for locally produced goods and imported goods. But in poor economies there are not enough goods to meet demand.
Aid and civil war
The largest resource flow to Africa is aid. Control of resources is what causes civil war. Remaining aid funds army so that people in power (rent-seekers) can stay in power.
Main Reasons put forward for Aid not working
Tribal, institutional, historical, cultural, and geographical but none of them place blame where it is due on developed countries that impoverished these countries.
7 Stages of Foreign Aid
1. Bretton Woods (1940s) 2. Marshall Plan (1950s) 3. Industrialization (1960s) 4. Aid as the answer to poverty (1970s) 5. Aid for Stabilization and Structural Adjustment (1980s) 6. Aid for Governance and Democracy (1990s) 7. Present: Aid only solution for Africa
Aid, Corruption and Rent Seeking
Aid stops savings and investment. Aid creates rent seeking as those in power take the money and use it for themselves. It reduces public spending as this money is used in the place of tax money and tax money is diverted to useless purposes. It creates dependency as countries remain dependent on foreign donors. It creates corruption through fungible aid.
