Trade Vs Aid Model Answer

Trade vs Aid model answer

“Countries at very low levels of economic development face such huge challenges that they cannot hope to address them without assistance from the rest of the world.” To what extent do you agree with this view?

(40 marks)

Intro

•  LDCs need external assistance to deal with huge challenges

•  Evidence that external assistance has helped other countries move from LDCs all the way to High Income countries e.g. South Korea

•  Typically that assistance has come in the form of Trade and Aid.

What are LDCs

•  Define terms – LDC as country with less than GDP $1000 per capita according to World Bank

•  Examples of different types. LDCs include:

–  Myanmar / Afghanistan – unstable governments

–  Nepal / Bangladesh – difficult geography

–  But 22 / 33 are in Sub-Saharan Africa – a key focus

So what are the challenges for SSA that might require outside assistance?

•  Population structure – high DR, high BR, resources stretched e.g. education / health so poor literacy and low LE

•  Reliant on cash crops – at mercy of international prices set by supply & demand e.g. coffee

•  Corruption – lack of educated population = weaker checks & balances e.g. media / voters

•  Poor infrastructure – lack of investment and often landlocked countries = high costs to export

•  Specific health problems – tropical + funestus & gambiae mosquito + falciparum parasite = high morbidity and mortality from malaria and loss of GDP (spent on health / lost productivity from morbidity)

To what extent is external assistance going to help tackle huge challenges –aid?

•  Aid (mulilateral / bilateral / NGO) can focus on areas that are not profit making e.g. malaria vaccines (£500m to invest in drugs) for world’s poorest – not an attractive investment for pharmaceutical companies.

•  Aid - partial success of aid in targeting MDGs is bringing down IMR faster than happened in Stage 2 of DTM in countries now in high income bracket. Aid works.

•  Aid is given in other areas without profit for trade e.g. education. Crucial for building human capital of a country – skills & knowledge. Side benefit of bringing down TFR as changing attitudes to family size / economic.

•  Aid is given for infrastructure e.g. road projects – tolls to create profit would harm trade. Also improves issues for landlocked countries e.g. Ethiopia – losing profits on coffee due to transport costs to Mombasa

•  Aid can get rid of debt e.g. G8 commitments in 2005 at Gleneagles summit. Repayments hold back countries from investing in areas already outlined.

•  BUT – external assistance through aid can actually hold back development if wasted through corruption (e.g. Kenya / Malawi examples) or if it creates a culture of dependency

To what extent is external assistance going to tackle huge challenges - Trade?

•  Trade is the alternative and often seen as being in competition with aid as the solution.

•  External assistance = high income countries buying goods from LDCs. We have seen this model work previously in South Korea – focus on export businesses to drive up GDP, taking SK through the development continuum into high income country bracket.

•  China has benefited from reduced import tariffs when it joined WTO in 2001

•  Without external assistance, trade rules will remain against SSA countries that rely on agriculture (80% of workforce and 50% of GDP) e.g. tomato subsidies of EU and import tariffs on tomatoes limits potential for SSA farmers to make most of climate and cheap labour to compete. EU farmers can actually undercut local prices due to subsidies.

•  Given growth of Asian NICs, there are now more high income and middle high income countries to act as importers to those countries looking to export.

•  However South Korea only achieved this through US aid after Korean war – invested in infrastructure (ports & roads) and education of workforce.

•  And countries can help themselves without always needing external support e.g. China’s SEZs and Bangladesh’s Export Zones.

Conclusion

•  It is inconceivable that LDCs could overcome such huge challenges without external assistance, particularly as the model for development e.g. Asian NICs saw high levels of assistance.

•  Tony Blair’s 3rd way seems sensible – a blend of assistance through Aid and Trade.

•  Use Aid to assist with areas where profits aren’t easily made e.g. education, health and infrastructure.

•  Use Trade to create long term sustainable economic growth and end a culture of dependency.

•  However, this requires high income countries to open their markets, particularly to agricultural exports and to keep on buying – an issue since the credit crunch.

•  It also requires many LDCs to help themselves – put pressure on politicians to deal with corruption / make the most of trade opportunities e.g. using SEZs.