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Aid can come in many forms such as:

1. help with key workers (for example how a load of nurses and doctors are helping the survivors of the tsunami is those areas; can also be teachers and other key workers)
2. help with supplies (such as food and clean water or even medical supplies)
3. MONEY! - well money is the most complicated one because it can be given conditionally (tied aid) or unconditionally (also as a loan, need i explain the effect this can have? it can be good or bad - i.e. having to pay it off SHOULD ensure that the country receiving it spends it on revenue-generating policies such as education and training or research grants; but the bad side is the interest on the loans may not be able to be paid if the country spends the money on other things such as medical supplies or even WHITE ELEPHANT projects).

Aid can also be from one country to another (bi-lateral) of from the world bank or other organisation (unilateral).

There are major concerns about giving aid to third world countries, some of the concerns include:

1. tied aid may not benefit the country directly due to harsh conditions, an example of this would be the STRUCTURAL ADJUSTMENT SCHEMES (SAPS, look it up!).
2. the country may have a corrupt governance which leads to money being wasted on either white elephant projects or even stolen by the political elite.
3. the aid may not be enough - remember SIZE MATTERS (evaluation marks, anyone?)
4. the interest on loans may not be paid therefore the country will be paying off the debt for years - this will lead to the country losing out in the long run, now that's not the aim of aid is it?!
5. the recipient country may not have the infrastructure required to make use of the aid properly - for example if hey want to attract MNCs or foster a good entrepreneurial spirit, a good infrastructure is required (phone lines, transport networks, etc)
6. the recipient country may not have the knowledge in order to make best use of the money they receive (in such cases economic analysts and helpers can be brought in, also as aid or at a cost)
7. I'm sure you people can think of more POST THEM!

Lastly, aid can be very good for the economy due to many factors such as

1. supplies help countries when they need the help most
2. conditional aid may have good conditions, such as the money must be spent on education and training, this by-passes the possibly corrupt political elite
3. free money can be good as long as the recipient country has a good record of handling money well (i.e. not wasting it)
4. key workers such as teachers will have a long lasting effect on those people they work with - increasing the knowledge in the country and shifting the LRAS to the right

World Bank

This consists of two organisations now, although when it was set up it was an organisation designed to relieve the short term BoP problems of LDCs. It now has 184 member countries contributing to it and deciding how the money is spent. The two parts are -

International Bank for reconstruction and development - IBRD

This part is responsible for the funding of various projects in cooperation with the local government. It lends out money either directly to private firms or to the government to do so at commercial interest rates.

International Development Association - IDA

This part lends money to the poorest LDCs to tackle BoP problems and the like on concessionary terms, ie long repayment periods and very low or zero interest rates. These are called soft loans.

A third organisation called the International financial corporation (IFC) is closely linked with the world bank and gives a type of aid without going through the local government - hence less likely to be affected by corrupt government officials, although more risky financially, since they buy into shares of firms or lend directly to them if the IFC believes that this will lead to higher levels of development.

IMF - international monetary fund

Bad ass press! Similar to the IDA in that it gives loans to governments although these are conditional loans - the loan has structural adjustment policies attached (SAPs). These are pretty set regardless of the country they're being used for and are also pretty harsh as they push the economy too hard to change and try to bypass 'take off'. They all too often lead to short and medium term rises in poverty although they tend to be successful for both growth and development in the long run. The bad press comes because of these SAPs making life worse for people, especially since they try to force the economy to change from LDC to MDC so quickly.

These SAPs include:

1. cut/drop in all subsidies and price controls so that market prices can be charged
2. Reduction in money in circulation (reduce inflation)
3. Reduction in public and rise in private employment
4. Private ownership of essential utilities (monopolies could form w/o regulation)
5. Lowering in barriers to trade

These policies will open up domestic producers to the low world prices and often send them out of business. This creates inflow of imports which could lead to BoP deficit problems. In the long run, efficiency will rise however with the incentive for lower prices. Also, the more open markets will be a greater incentive for MNCs to invest in that country.

Basically, SAPs bone countries like a femur in the short run but usually work out in the long run - of course, there are exceptions.

There are also organisations that help countries by other methods -

• Food and agriculture organisation (FAO) has managed to increase the food supply by more that double over the last 60 years, outstripping the doubling in world population -go them!
• UNICEF works to decrease poverty for children by overcoming obstacles of disease and discrimination
• UNESCO are the Peace keepers, Jedis of the world. Human rights people that enforce equality of race etc.

MNCs

MNCs are Multi National Companies! They come in many shapes and forms from coca-cola to Nike, they are much sought after by many countries due to their tendency to be so large that they can fully exploit economies of scale and thus be very competitive in world market, the plus points include (among others):

1. MNCs have such large amount of capital that their yearly turnover can be more than some countries' GDP, thus having an MNC present within your country promotes economics stability.
2. MNCs promote good infrastructure, they will do all they can to better transport links and phone lines - this will benefit the whole country.
3. MNCs create jobs in their local area, this can totally revive some parts of the country, and will lead to higher demand for labour, thus wages will rise (may cause inflation) and AD will shift right, thus economics growth will occur.
4. the main aim of an MNC is to exploit economies of scale in order to be competitive in international markets - this means that one of their primary aims will (indirectly) be to better the current account position.
5. When an MNC first arrives to a country it will require buildings, land labour and capital, the capital aspect (machinery, buildings, etc) will be a positive on the financial account, better the balance of payments straight away!

All those are very good points, promoting price stability, low unemployment, balance of payments on the current account and economic growth (four of the main macroeconomic objectives). but there are negatives associated with MNCs, including:

1. MNCs are driven by producing at the lowest costs, so they usually set up in places where labour is cheap, they will then exploit workers in LDCs (shell oil, or Nike, anyone?).
2. MNCs yield a lot of power over the country they are in - once in the countries governance will do little to regulate them of the fear that they will leave. they will also do a lot to keep them where they are, orrering tax breaks, etc.
3. When MNCs set up they may bring in key workers from their own countries - this means that unemployment may not fall as much as would be desired.
4. wages from the workers and profits may be repatriated so all in all, over time, the capital account will worsen, thus the balance of payments might not look so good.

FDIs

Everything to do with MNCs pretty much applies to all types of FDI,

Finally the means by which countries attract FDI:

1. low corporation tax acts as an incentive to MNCS and other companies to invest in a given country - low rates will act as an incentive to maximise profits within that country.
2. Stable economies attract FDI because any company lkes a stable economy, this means basically low inflation. this is helped by the use of *fixed rule* fiscal policies (such as Gordon browns golden rule)
3. flexible labour laws and low trade union power - this makes it easy for any company to *hire and fire* workers, the UK has low trade union power (after the thatcher years).
4. low wage rate - low wage rates mean a lower cost of production for the company - this leads to them being more competitive in international as well as domestic markets and will increase their profits.
5. Good infrastructure - companies like countries with good transport links and communication lines. transport links are required to get raw materials and to distribute goods.
6. country links - whether the country is in a free trade area, or customs union will have an effect on the MNC this is because they can have access to a market without trade distortion (such as the many forms or protectionism)

Comments

These notes are aimed at people studying for Edexcel A Level Economics Units 1, 2 and 3; but will also be suitable for other courses and exam boards.

Originally submitted by Philosophical and Master Gee on TSR Forums.