Foreign Aid and International Trade

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Introduction

The aim of this research is to identify and explain the causes behind issues concerning the misuse of foreign aid and the imbalances created by international trade, while providing concepts for potential long-term solutions. The research will go over the respective issues, detailing the issues themselves, their causes, consequences and possible solutions for them. This research will also go over their relevance and importance in the personal, national, and global perspective. It is important to note that the information presented in this document is based on the sources as a whole rather than being directly linked to an individual source unless stated otherwise. This document is intended for persons or groups of interest whose occupation or study focuses on foreign aid and international trade.

The main issue for each is as follows:

  • Foreign Aid: Its misuse or bad application by the receiving government Comment by Julius Soquena: These are not clearly stated as issues. What is debatable about these 2 statements?
  • International Trade: The problems it can cause in the host country's business and employment

Foreign Aid

The Problem: Foreign Aid

Foreign Aid, coming from abroad is well-intentioned: to help support and accelerate economic and human development in its target area. However, once it reaches the government of the country receiving aid, there is always the risk of it being used for other, less relevant projects or simply not being used at all, more so in a corrupt government. A corrupt government or corruption in particular is defined by the Merriam-Webster dictionary as “dishonest or illegal behaviour especially by powerful people (such as government officials or police officers.” Often, the groups most vulnerable to corruption are the poor, one example is in Paraguay where 12.6 percent of a “poor' person's income is lost in bribery, in countries like Sierra Leone the number is closer to 13 percent according to an article by the World Bank.

Matthew Rycroft, permanent secretary of the Department of International Development in the UK told a civil service website that two common arguments raised by skeptics are that problems are too big to fix, and that the process as a whole is subject to corruption. He admitted those claims were indeed “valid criticisms” that needed to be addressed. This is supported by the information that DfID fraud cases quadrupled between 2010 and 2015. Comment by Julius Soquena: Are you implying here that one of the issues whether corruption in foreign aids can be solved or not?

Foreign aid misuse however is not solely the result of corruption. Poor financial management or an unforeseen disaster or issue may redirect aid that a country receives away from its initial objective and create a situation where aid money or resources were utilized, but the aim has not been achieved. Comment by Julius Soquena: I can see another issue here.This seems to imply an issue if Foreign aids have been helping recipient countries. But arguments are not balanced.

Understanding why a Government – regardless of corruption – can end up misusing Aid:

The largest reason aid is susceptible to misuse is because of the fact that most bilateral aid is not from government to citizens, but from one government to another government. When the government receives aid – which is often (but not exclusively) in the form of capital – they have final jurisdiction on how it would be allocated. Once the government receives the aid, there is no outside authority that can physically or legally prevent it from using it for other purposes because once the credit is converted to the receiving country's legal tender, it is indistinguishable from the government's discretionary budget from other sources of revenue.

Although such an approach where the application of aid was left to the local government had effect (Rwanda, 1994), based on initial personal judgement, it seems more of an exception than the norm given that the situation in Rwanda was different (preventing ethnic tension and violence alongside UN Peacekeepers) from the most common form of aid (developmental aid, which focuses more on infrastructure and economics as well as disaster relief.) Comment by Julius Soquena: This could be an argument to support a position that misuse and corruption cant be tracked or prevented. Comment by Julius Soquena: Good point for an analysis. But need to be placed with the issue it is debating.

Another reason may simply be a government’s inexperience leading to bad application and planning for foreign aid, using it as more of a stop-gap measure to solve immediate problems instead of being invested in long term prevention. That means there is little left to be used in mitigating future damage and eventually lowering the burden – particularly financial – on a society to recover. While that strategy is indeed a valid one, it's sometimes followed irrespective of the purpose of the aid being received. Comment by Julius Soquena: Good analysis of causes and consequence. But again, of which issue?

Possible Scenarios:

This redirection or misuse of aid means that citizens do not get the infrastructure and service investment that they require and that keeps development hampered and that lack of progress does either one of two things: either it encourages even more foreign aid to be sent to the country, only for it to be poorly managed again and hamper development; or it aid could be withheld if the donor sees it as a reason to believe that aid is ineffective. It would damage public opinion of foreign aid in both the donor and receiving country, however receiving large amounts of aid certainly does have noticeable effects on public opinion of the donor. Comment by Julius Soquena: Explanation of a consequence. But this also be used as an argument to prove a claim or a position.The issue can be, to what extent development is achieved through foreign aid.

A survey was conducted by Pew Research Center and the Kaiser Family Foundation was conducted to gauge public opinions on the efforts of nations donating aid to their country, and Pew Research Center gave the following statement:

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“Majorities in nearly every country surveyed say wealthier countries are not doing enough to help poorer nations with problems such as economic development, reducing poverty, and improving health. But among countries surveyed that were major recipients of development aid, people were much more likely to say that wealthy nations are “doing enough” to help poorer nations.”

The US-based Pew Research Center is according to itself: “a nonpartisan fact tank that informs the public about the issues, attitudes and trends shaping the world.” It claims to be factual and unbiased and its credibility is strengthened by its reports being used as sources by outlets such as the New York Times. Foreign aid falls under its “Foreign Affairs and Policy” section and has published articles on foreign aid in 2015 and 2016. The section is headed by Michael Dimock a political scientist with a Ph.D. of political science from the University of California – San Diego, which is convincing enough to give their statements credence on the topic.

Corruption could set a potentially dangerous precedent where aid is potentially mishandled on purpose but aid is still sent. That incentivizes corrupt governments to follow a similar model, as a matter of fact this can already be seen in the Democratic People's Republic of Korea (DPRK), where the government receives food aid, redistributes it unfairly by inflating prices several times beyond their original value, and continues demanding food aid or they threaten to limit the population's access by inflating prices even further. This has given the government political leverage to continuously receive aid and continuously misuse it because of the high moral and human cost of not cooperating, according to Yeonmi Park, an outspoken North Korean defector and critic in her book “In Order to Live.” While the testimony of a defector may be biased against the DPRK, historically that scenario would not be surprising.

Proposed Solutions:

A solution that can be considered is instead of giving aid upfront as a lump sum, it can be given slowly and conditionally, only growing as the quality of life grows. This can limit the extent to which foreign aid can be misused and incentivise worthwhile investment. If there is no real progress being made, then a re-evaluation of strategy will have to be done, possibly by using more field personnel or to make it more targeted towards certain aspects of domestic affairs or certain communities. If necessary, even temporarily halted as a preventive measure, even as morally compromising and hard to justify as that would be.

International Trade

The Problem: International Trade

The rise of International Trade in recent decades is generally seen as a net improvement to countries and their populations in terms of employment and business potential. However engaging in International Trade means competing with massive foreign markets and companies, leading to many smaller companies and industries (primarily local) being ‘driven out' of business as Transnational corporations (TNCs) have more resources to give them a competitive advantage and paradoxically, hurt the employment and business potential of the local population. Transnational corporations are corporations that operate across multiple countries either by directly opening outlets or acquiring local businesses, some examples are Microsoft, Apple, and Nestle.

Possible Scenario:

When a country – especially one that was previously protectionist or restrictive – begins to participate in International trade in a significant way, there is a sudden increase in demand among the local population for foreign products and services, and conversely, there is now a potential new market for overseas companies to invest in. However, the companies most capable of exploiting that fact are large, TNCs who can be a magnitude larger than local industry and businesses. The local business simply cannot compete on an equal level with a TNC if the difference between them is large enough and demand for the latter is higher (as with most foreign goods) if they are similarly priced. They also affect domestic policy according to azcentral (a part of the USA Today Network): “Because of the direct investment they bring into the country, multinational companies exert influence on governments to adapt policies that are suitable to multinational companies. These policies aren't always advantageous to local businesses.”

Consequences (Expanded Scenario):

The most obvious consequence is financial losses for the local industry. Employment goes to the TNC and their earnings within the company go to its shareholders, who are mainly abroad, instead of to the host country, dampening both local reinvestment and industry on a national level as foreign brands make up more and more of the market. It will also cause higher unemployment as new local businesses fail to compete and job opportunities at the TNC begin to be filled, a lot of it by low-skill labour.

This can and does happen almost anywhere where there are small local businesses, and a demand for foreign goods, it also defines the dominant industries in an economy that is increasingly dependent on international trade. The United Arab Emirates for example is heavily reliant on shipping and flying goods between markets due to its geographic location.

Analysing Perspectives:

Not all perspectives are negative towards TNCs and International Trade. In fact it is the general consensus that International Trade is a generally positive factor in all countries. A common argument being that Transnational Corporations (or any foreign business for that matter) allow other groups like women and rural communities and the poor the ability to work and find employment. This is undoubtedly a possibility and something that would come as a natural result of a TNC establishing itself.

However, opinions do change over time and a survey by Pew Research Center shows that public opinion of International Trade in countries like the USA, Italy, France and the UK, noting that Western countries tend to have overall more negative opinions “where economic growth has been relatively modest.” This is a reasonable statement as when economic growth is not exceedingly rapid, it is difficult to gauge the benefits of International Trade, especially when preceding growth has been relatively consistent and linear.

Proposed Solutions:

There are not many solutions to completely prevent these issues, however there are ways to mitigate the negative impact of TNCs. One is by increasing Corporate tax so the host country can receive part of the revenue of the company it is hosting. There is also the possibility of selective tariffs and policies for certain goods so that local industries can still remain competitive. Antitrust laws also maintain a fair market by preventing excessively large businesses taking over. The host country can even accept the change in the status quo and instead focus on specializing in an industry it is confident will not be negatively affected, or already has an experienced workforce for. All of these are viable, but it depends heavily on the conditions under which they will be applied and there are definitely situations where none of these are applicable.

Personal Response

The topics of foreign aid and International trade are very broad and many times it is on a case by case basis when it comes to assessing their effects and the driving causes behind them, this research may not be applicable in every case, but it does outline a general trend in the effects of trade and aid. As to the importance of this issue, foreign aid is a common part of foreign policy. The United States is the biggest contributor to foreign aid and China has begun investing billions of dollars into African economies to gain leverage (this statement is however based on my assumption after reading headlines in passing.) The topic of International Trade is important because practically it's happened since the dawn of civilization, so there is clear relevance to the modern world, especially in the now globalised society we now live in.

Foreign aid is not perfect, it can't be because of all the connections between people and organisations that the process of foreign aid is conducted through. It can however be refined by changing working practices to be more secure and more traceable and easier to oversee. International Trade is harder to refine as a process, because it is more of a circumstance that countries trade for goods freely for the most part. Regardless, there should absolutely be a way to mitigate the negative impacts of corporations on foreign business because of trade bringing their products into said foreign markets that generally compete better against local goods because of the naturally high demand in countries for foreign products.

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