The different types of aid are humanitarian, bilateral, and multilateral. Humanitarian aid is normally administered by large aid organizations or governments to address a specific and discrete issue. This is not a loan. Bilateral aid is essentially a loan made by one country to another, yet with a friendly interest rate and a very long period of time before payments are due. Multilateral aid is the aid administered by a single organization that receives its contributions from many other countries, like the IMF. Furthermore, aid may be official, or sanctioned by governments and international organizations such as the UN, or it may be unofficial, such as aid from non governmental organizations.

The intelligent implementation of aid may promote the development of economies. Yet there are many stipulations and requirements that must be met lest aid has very little to no impact, or worse yet, a negative long term impact on those receiving aid.

The economic reasons for providing aid are supplementing the lack of domestic resources, enabling infrastructure changes, and breaking the cycle of poverty by allowing for savings to accumulate. When these goals are appropriately met, growth will result. Countries receiving aid will typically want as much freedom with grants as possible, while countries giving aid will try to keep as much control of their grants as possible. Donating countries do not wish to see their funds lost to wasteful spending or corruption. Furthermore, donating countries can see their aid as an investment, and duly expect returns. There are also political arguments in support of aid: aid can be a tool of foreign policy that supports friendly governments economically and militarily. This type of aid has had hugely varying results in the past. A huge amount of aid was given to Chiang Kai-shek’s corrupt and unpopular regime before the Communists won the Chinese Civil War and expelled him from the country. On the other hand, the Truman Doctrine passed by American congress after World War Two protected Turkey and Greece from falling under Soviet control.

However, other economists argue that aid can oftentimes be ineffective and actually worsen the long term economic conditions of a country. Sometimes, governments become dependent on aid by factoring them into budgets. This traps donating countries into a relationship that may turn unhealthy. Aid may also be quite inefficient. Recent studies have shown that aid provided by NGOs in the form of unskilled overseas volunteers (typically in construction like in Habitat for Humanity or in education) is damaging. Not only do unskilled volunteers do a worse job than locals were capable of (building awful structures that collapse shortly thereafter), they effectively destroy the local market economy system by offering their labor for free. This page http://www.aim.org/aim-column/africas-aid-problem/ presents a strong case against giving aid to Africa.

Therefore, I conclude that aid may be effective in promoting the development of economies only if it is well intentioned and intelligently administered. A shortcoming in either of these requirements can have negative effects. Unfortunately, humans tend to be imperfect, and therefore screw up attempts to provide aid. In most cases, we should leave socio-political and economic factors to do their own magic.

Bonus paragraph on the desired effect of aid:

The purpose of aid is firstly to overcome the low savings ratio. Savings are not very large in underdeveloped countries because citizens must spend their money on a daily basis just to survive. Savings allow for investment and if put into a bank, will create liquidity that businesses can draw from. Infrastructure is also an important part of development, and successful aid will see an increase in it by reducing foreign exchange outflows. Another goal of aid can be the reduction of government dependency on private investment. Other goals include the improvement of the standard of living in the target country, providing sustainable improvement (the idea of giving a fishing rod, not fish), and allowing for countries receiving aid to still act autonomously (not keeping heavy ties on aid).

Unfortunately for me, I performed quite poorly. I mainly attribute this to my lack of precision in defining key terms (or lack of defining key terms completely) and underdeveloped concepts. A typical paragraph that is focused on trading blocs will use the EU as an example to discuss tariffs. In a side note, I would mention other benefits of being in the EU besides reduced tariffs without actually going into detail on things such as a common currency, common agricultural policies, and political agendas.

Similar thing happened in my discussion of China, used as a real world example of a country that is heavy on exports and ownership of foreign government bonds. In both cases, I did not mention specifics on exports and the ownership of bonds.

I’m looking forward to a retest (I suppose) so I can improve my grade and showcase my economic understanding of Section 4.

HDI (2007)

0.365 ( low) (180th)

As you can see according to the information above, Sierra Leone is not off to a good start.

Yet in addition to one of the lowest HDIs in the world and a pitiable GDP per capita, being poor is only one of the problems in the country. Just recently emerging from a civil war, the country is slowly improving, yet corruption (one of the central causes of the civil war) is still an issue.

Infrastructure is weak, and although Sierra Leone is rich in mineral resources (its main export), it has a history of not mustering the infrastructure and legal system necessary to legally export and tax the goods. Foreign investment is still a large issue as Sierra Leone is largely perceived as unstable.

Education is Sierra Leone is quite poor, with laws requiring education although there are not enough schools and teachers to actually serve the population required to attend.

TIA

Free trade and protectionism

Economic Integration

World Trade Organization

Balance of Payments

Exchange Rates

Terms of Trade

a) There has been an increasing trend in different parts of the world for countries to engage in economic integration through the formation of trading blocs. Using suitable examples, explain the different types of trading bloc that may be formed. (10 marks)

b) Evaluate a country’s decision to join a free trade area (FTA) (15 marks)

Demands: prompt A demands that the student identifies and defines the different types of trading bloc. Then, with the use of examples for each type of trading bloc, the student must explain why these real world examples are accurate.

Prompt B demands an evaluation of an imaginary country’s decision to join a FTA. Evaluation in this case should likely include aspects like short term and long term effects, stakeholders, pros and cons, other consequences, and macroeconomic goals.

Definitions:

Free Trade Area

Sovereign countries belonging to a free trade area trade freely amongst themselves but have individual trade barriers with countries outside the free trade area. All members have most favoured nation status, which means that they are all treated equally.

Examples include the North American Free Trade Area (NAFTA) between the USA, Canada and Mexico; Asia Pacific Economic Cooperation (APEC) and the Common Market of Eastern and Southern Africa (COMESA).

Customs Union

In a Customs Union, countries have free trade amongst themselves, as in an FTA, but they are no longer fully sovereign over trade policy. There will be some degree of standardisation of trade policies. They will have a common external tariff (CET) which is applied to all countries outside the customs union. The countries will be represented at trade negotiations with organisations such as the World Trade Organisation by supra-national organisations, e.g. the European Union.

Common Market

This trading bloc is a customs union, which has, in addition, the free movement of factors of production such as labour and capital between the member countries without restriction. Mercosur is an example of a common market comprising of a number of South American nations. The European Union is also a common market and people and capital can flow between EU members without restriction.

Economic Union

This is a common market where the level of integration is more developed. The member states may adopt common economic policies, e.g. the Common Agricultural Policy (CAP) of the European Union. They may have a common currency like the Euro in the EU. This will involve common monetary policy – in the case of the EU, monetary policy is operated by the European Central Bank (ECB) in Frankfurt.

Economic Integration from Power Point

Relevant Diagrams to Economic Integration

Free trade

Specialization:

GDP – total output of an economy

payroll tax cut – type of stimulus

stimulus -

first quarter

FED

Gross injections – increase in funds into the economy

securities

treasury

recession

v shaped bottom – steep recession and recovery

economic recovery

fiscal stimulus – tax policy, government spending policy

monetary stimulus – interest rates, money supply

unemployment rate – number of those out of work who are seeking work / total workforce

real GDP per capita – total value of all goods and services in an economy / population

animal spirits – greed, fear, confidence, emotions

nominal GDP per capita

invest – funds used to increase business output

consumer

investment tax credit

seller depreciation

double dip – recession, recovery, recession

fiscal deficit – government debt. results from stimulus, has long term consequences

fiscal tightening

reflating -

lagging indicator – (of economic growth or shrinkage)

cyclical unemployment – business cycles boom and bust

structural unemployment – resulting from the structure of an economy

structural change

AD = C + G + I + (EX – IM)

MICROECONOMICS

INTERNATIONAL ECONOMICS

factor endowments – factors of production that are

specialization – the act of an entity focusing on one particular task with the usual added benefit of increased efficiency

free trade – trade uninhibited by government regulation and taxation

tariff – tax levied on imports. may have the purpose of increasing protectionism

quota – limited amount of a good allowed to be imported. set by the government. usually for the sake of protectionism

subsidy – opposite of a tax. money given to a firm by the government

dumping – the act of purposefully underpricing exports so local competitors are put out of business. price hiked up after the fact

anti dumping – legislation that stops dumping from occurring. tariffs or quotas are popular solutions

infant industry – an industry in a country that is still developing and therefore is inefficient. it is argued that this type of industry may deserve protectionism

A free trade area is a group of countries which removes tariff barriers between member countries but allows each member to decide on its own tariff policy towards non-members.customs union

expenditure reducing policies

fixed exchange rate – price of a currency set by the government. maintained by buying and selling currency on the global market. will require large monetary reserves

floating exchange rate – price of a currency determined by supply and demand

depreciation – loss of value of a currency

appreciation – increase in value of a currency

devaluation – loss of value of a currency due to government reassessment of policy

revaluation - increase of value of a currency due to government reassessment of policy

The UK government has stated its intention to bring itself out of recession through an export based economy, yet for the moment it does not appear to be working. This is a result of the ML condition, represented by the J curve which states that a country’s economic policies will tend to have a lag time during which there shall be a decrease in output.

See the dip?

The UK is presumably at the bottom of the curve at the moment. After this slight dip in output, there will be an increase in the long term.

The graph shows that from 1974 to 1980, Germany had a steady current account approximately at zero. The account then dropped to -5 from the early 1990, until it started increasing from the year 2002. Currently we can see that Germany's account is in surplus, ranged from 5 to 15. Overall the trend seem to be very inconsistent, since the account increases of decreases very frequently. … Read More

via Keita's Econ Blog

China’s currency is the renminbi. From 1997 to 2005 the RMB was pegged to the US dollar. This is a fixed rate, or an exchange rate that a government keeps constant in relation to another currency or set of prices. After 2005, China maintained a managed currency. In the wake of the economic crisis in 2008, China has been accused of keeping the value of its currency artificially low. This is achieved by the government’s monetary policies.

The most prominent way the RMB has kept its value down is through the purchase of US debt. What this does is flood the currency market with RMB and take USD off of the market. Due to the laws of supply and demand, this decreases the price of the RMB and increases the price of the USD. In direct relation to one another, the RMB is heavily devalued through this policy.

An increase in the supply of RMB

As shown in the diagram above, there is a shift in the supply of RMB. This shift is caused by the government increasing the supply of RMB on the currency exchange market from Q1 to Q2. The effect this has is a decrease in the price of RMB from P1 to P2, thus achieving the desired effect of devaluing the RMB.

In the articles provided, there seems to be consensus in China’s manipulation of its currency. It is a matter of public record that China owns billions of dollars of US debt, and it is a matter of common knowledge that this devalues the RMB, especially in relation to the USD. The only counter argument to China devaluing its currency is that many other countries are also devaluing their currencies. Although this may be true to a certain extent, it in no way refudiates lol the fact that China does indeed manipulate its currency. This argument implies that a currency war is already underway. A currency war is an effort of multiple countries to strengthen or weaken its currency, and a move on one side provokes a move on the other, as all currency’s values are relative.

In recent months Beijing has released statements pledging to loosen government control of exchange rates, and there has been an increase in the value of the RMB. This comes amidst growing international pressure to revalue the RMB. So China has the motivation (competitive exports) to devalue its currency, there is evidence of it (ownership of foreign debt), and there is practically a confession of it (as illustrated earlier in this paragraph). And so, China has most definitely devalued its currency.