EC 320 PS 3 answers

EC 320 PS 3 answers - Economic Development EC 320 Problem...

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Economic Development EC 320 Problem Set 3 November 11, 2010 1. Why do donor countries like the US, France, Japan, China, and Norway give foreign aid to developing countries? [10 points] Foreign policy reasons, for instance competing with the Soviet Union during the Cold War, promoting peace between Egypt and Israel, maintaining ties with former colonies. Commercial reasons, for instance securing oil supplies, building infrastructure that will make foreign direct investment more profitable. Helping after natural disasters like earthquakes, tsunamis, hurricanes, droughts. Promoting economic development. 2. Why does foreign aid often fail to promote economic development? [15 points] When it has other goals, it may not help development. Providing tents and clean water after a natural disaster may not help long run economic growth. Providing cash to a dictator to win his political support or to help him win a civil war also may not promote development. Foreign aid may encourage corruption. Because the money is “free,” there are no local actors to pressure politicians to spend the money for development. Donors may choose projects that locals don’t value, won’t maintain, won’t use productively. Aid may overwhelm the capacity of the recipient government to manage. Developing countries often have very little income, very little capital, and very few educated workers who can manage government projects. Too many projects or projects that are too complicated to administer may not contribute much to economic development. 3. An irrigation project costs $1000 to build. Assume all the costs occur on the first day of the project’s life. The project will increase farm output by $150 per year for 10 years, with revenue coming at the end of each year. It is not feasible to measure how much water each farmer consumes, so no revenue can be collected. a.
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This note was uploaded on 03/02/2011 for the course ECON 320 taught by Professor Carliner during the Spring '11 term at BU.

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EC 320 PS 3 answers - Economic Development EC 320 Problem...

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