Distinguish between foreign aid and foreign direct investment.
Foreign aid is the international transfer of public and private funds in the form of loans or grants from donor countries to recipient countries that can be given in three main ways: humanitarian, bilateral, or multilateral. Foreign direct investment on the other hand is overseas investment by multinational corporation. (a firm that has productive capacity in a number of countries)
Explain why the earthquake and tsunami in Japan is likely to affect Japan’s capacity to donate foreign aid.
After being struck by the earthquake and tsunami, Asian countries, such as India, Indonesia, and the Philippines worry that the projects (foreign aid) funded by Japan may be dropped or rescheduled. This is because, the natural disasters have had an effect on Japan’s economy.
As shown in the Figure above, the natural disaster has caused Japan’s aggregate supply, the total amount of domestic goods and services supplied by businesses and the government, including both consumer goods and capital goods has shifted from AS1 to AS2, causing the overall economy, as shown by the GDP to decrease from Y1 to Y2. Furthermore, in order to make up for the decrease in their GDP as well as to reconstruct the areas that have been damaged, Japan’s ODA, the official development assistance will be reduced. In other words, in order to ameliorate the condition of Japan, they will use the money they would’ve used for the ODA.
Explain how reductions in Japanese foreign aid might affect the economic development of the recipient nations.
Japan, not only being known to be the world’s third greatest economy, is also the fifth largest donor of development aid, meaning that Japan donates a lot of money to foreign developing countries. Additionally, according to OECD, Japan’s aid disbursements totaled $9.47bn in 2009, which was a greater than the amount of Spain, Netherlands, Sweden, Norway, and Canada. Hence, the reductions in Japanese foreign aid will have a great affect on the economic development of the main recipient nations, whereas it may not have a great of an effect on the other recipient nations who do not receive as much aid from Japan.
The countries who receive a lot of aid and depend highly on Japan’s ODA, such as the Philippines will be greatly affected. More specifically, their development projects will slow down due to the decrease in aid. Since the Philippines relied heavily on the aid from Japan, without its support, their development project will not run as smoothly and efficiently as it would’ve. The Philippines will not be able to support the project on its own and hence, they will need to result to a new plan involving a slower process. Furthermore, other concerns such as unemployment may arise due to a decline in demand in the service sector as a result of a slowing industrial activity.
Other countries who do not receive as much aid will not be as affected as they, unlike countries such as the Philippines, who heavily relies on the aid from Japan, will be able to sustain their projects on their own as they will continue to receive support from other countries.
Evaluate the arguments for and against foreign aid.
Foreign aid both benefits and hinders the stakeholders. Stakeholders include the recipient nations as well as the donor nations.
Recipient nations, including industries and its government benefits and is negatively affected from foreign aid. First, considering the pros, the recipient nations will be able to use the aid, more specifically, bilateral aid and/or multilateral aid in order to work on projects in order to help the development of the country. In other words, in the aid will help the recipient nations in the short run. This can cause an increase in supply of the nation, increasing their GDP, which benefits the government and the industries specifically. However, in the long run, this can lead to further debt as depending on cases, the recipient nations will have to pay the donor countries back. Such cases include situations where the aid is provided by donor nations in a form of a loan. Therefore, while the bilateral/multilateral aid benefits the recipient countries in the short run, in the long run, it may lead to an increase in debt.
In cases of humanitarian aid, after a country is struck by a natural disaster, this will benefit the recipient nations but depending on the level of dependence, this may hinder the nations. This is because humanitarian aid is not similar to bilateral and multilateral aid, where the nation is subject to re-pay the donor countries. Therefore, the nations receive help, which will ameliorate the situations in those countries after the catastrophe. For example, the article mentions the Tohoku earthquake and in the photo, we can see South Korean rescue workers helping collecting bodies of Japanese earthquake victims. The South Korean rescue workers in this case are the humanitarian aid as the increase in rescue workers will allow Japan to recover and reconstruct their country more efficiently. However, if Japan relies too heavily on the humanitarian aid, their own workers will not work as hard, and the nation will be too dependent on other countries. In other words, Japan will not be able to sustain itself without the aid from the other countries.
The donor countries will also benefit and hinder from providing other countries with aid. In cases of humanitarian aid, the donor country will benefit as they will be able to have better relations with the countries that receive the aid. For example going back to the same example, by providing humanitarian aid, South Korea’s relationship with Japan will ameliorate as Japan will owe a sense of loyalty to South Korea.
In cases of bilateral aid, the aid may hinder or benefit the donor country. By providing nations with aid, the nations will be able to have a better relationship. However, the donor countries can be hindered when they do not receive the money the recipient countries owe them. This is an opportunity cost, as the donor country could’ve used that money they provided as aid elsewhere, for example, providing subsidies for education, instead of providing aid to a country in a form of a loan.
However, in the end, I believe the arguments for foreign aid overweigh the arguments against them as the relationships between countries are important. This is because this can greatly affect the trade between two countries. Furthermore, people in developing countries will never be able to escape poverty without the aid from other countries. Similarly, when a country is affected by a natural disaster, without humanitarian aid as well as bilateral/multilateral aid, it will take a long time for the country to reconstruct.
Explain the concept of windfall tax.
Windfall tax is tax imposed by the government on certain industries when economic conditions allow those industries to make above-average profits. Most often, these industries are commodity-based businesses. Windfall can also just mean an excess of money.
Identify the reasons why the Zambian government imposed a windfall tax on the mining companies.
The Zambian government has imposed a windfall tax on the mining companies because, according to the Finance and National Planning Minister, Musokotwane, mines are making extra revenue. This is because resources found by mining is demanded a lot as they are essential resources in creating products. The government, by imposing windfall tax is then able to gain more revenue and help carry out the developing projects to help the conditions in their country.
Explain, using evidence from the article, why the Zambian government does not consider its debt situation too problematic.
The Zambian government does not consider its debt situation too problematic, as shown through the IMF figures for 2011: “Zambia was rated as the third least indebted country.” This figure was calculated by finding the ratio between the nation’s debt and the GDP. This can be explained by the increase in exports.
As shown in the diagram above, the increase in exports, as shown as Dr. Musokotwane states how “Zambia was within the league of countries which were biggest exporters on the world market.” More specifically, “the capcity of Zambia’s exports had grown 10 fold compared to the levels they were in 2000.” This increase in exports can be seen through the shift in the aggregate supply, causing an increase in the real GDP as shown from the shift, Y1 to Y2. Assuming that the government is competent, we can come to a conclusion that the increase in GDP can lead an increase in government revenue, which allows the Zambian government to pay back their debt, making them the third least indebted country.
Examine the conditions multilateral agencies, such as the IMF or World Bank, could require the Zambian government to adopt if they were approached for a concessionary loan, and the rationale for doing so.
A concessionary loan is a loan bearing no interest or a rate of interest that is below the average cost. Multilateral agencies, such IMF or World Bank can require the Zambian government to adopt different conditions.
Agencies, such as the World Bank, who aims to help the fight agains poverty in the world by providing loans, support, advice and information to developing and middle-income countries. Such agencies may require the Zambian government to adopt conditions that helps reduce poverty in Zambian and hence, increase living standards. Such conditions may include an increase in educational subsidies. By implementing such subsidies, a greater population will be able to attend school and receive education. Other subsidies may include health subsidies that will help increase the living standards of the people in Zambia. The rationale for requiring such conditions, more specifically, such subsidies, include
Furthermore, agencies, such as the International Monetary Fund (IMF), an organization established to encourage international co-operation in the monetary field, the stabilization of exchange rates and the removal of foreign exchange restrictions. The IMF may require the Zambian government to have less regulation on their businesses, as this will decrease the level of protectionism, which was initially implemented by the government in order to protect the domestic goods from the imports. However, with the decrease in protectionism, there will be an increase in imports. Moreover, with less protectionism, in a form with lower or no tariffs, there may be an increase in demand for the imports. By requiring less regulation, the increase in imports will benefit the other countries and their currency. This can help the IMF encourage stabilization of exchange rates and remove the restrictions imposed by foreign exchange.