Effectivess of Foreign Aid as a Form of Multinational Financial Essay

Effectivess of Foreign Aid as a Form of Multinational Financial Assistanse - Essay Example This paper presents comprehensive analysis of the effectiveness of the financial aid as a form of foreign assistance to the economy of a recipient country. As a condition for aid money, many donors apply conditions that tie the recipient to purchase products only from that donor. In a way this might seem fair and â€Å"balanced†, because the donor gets something out of the relationship as well, but on the other hand, for the poorer country, it can mean precious resources are used buying more expensive options, which could otherwise have been used in other situations. A country from the third world that feels difficulties with its budget may turn to the International Monetary Fund (IMF), World Bank or one of the Major Developed Countries (MDCs) for assistance. Since such assistance is usually given on some condition, it involves agreement to modify domestic economic policy.In this case creditor country (or organization) restricts free trade with protectionism in which barriers to imports (tariffs and quotas) are established in order to protect their industries from foreign competition. Government regulations also protect the environment, agriculture and workers of the donor country or organization. It was reported, that 71.6% of American bilateral aid commitments were tied to the purchase of goods and services from the US.† That is, where the US did give aid, it was most often tied to foreign policy objectives that would help the US. The origins of the foreign aid policies of the industrialized democracies are complex and varied. ... In the Reality of Aid 2000 (Earthscan Publications, 2000 cited in Shah 2006) reported in their US section that "71.6% of its bilateral aid commitments were tied to the purchase of goods and services from the US." That is, where the US did give aid, it was most often tied to foreign policy objectives that would help the US. Leading up to the UN Conference on Financing for Development in Monterrey, Mexico in March 2002, the Bush administration promised a nearly $10 billion fund over three years followed by a permanent increase of $5 billion a year thereafter. The EU also offered some $5 billion increase over a similar time period. History of Foreign Aid Countries of Latin America The Worlds debt crisis of the early 1980's was the culmination of a build up of external debt of developing countries, a large part of which was accounted by a progressively rising short-term debt. The debt of Less Developed Countries (LDCs) was triggered largely by demands from the balance of payments effects of the oil crisis that started in 1973/74. The debt build up became more apparent towards 1980 when third world borrowers resorted to rolling over their debts. (Stambuli 2002) A combination of very tight internal fiscal position and increasingly fragile balance of payments, most developing countries contracted new loans to liquidate maturing loans. In some cases, entirely new loans were contracted to service interest only. At the same time bankers in the western world ignored signals of an imminent debt crisis and remained more than willing to refinance maturing loans of developing countries, but with shorter maturities. In this process, third