Funding Economic Development

Imagine a developing country planning to build a comprehensive transport network to facilitate trade within and beyond its borders. This involves constructing roads, railways, and ports, each of which requires significant investment. Given the financial requirements and the challenge of attaining funds, the government applies for loans from various international developmental banks and invites private sector participation. This amalgamation of various sources constitutes the 'funding' for the economic development project of infrastructure enhancement.

The TANF program, funded by the federal government, provides financial assistance to families in need. Established as a response to increasing poverty rates, the program offers temporary financial aid while encouraging the recipients to find jobs as a long-term solution. The goal? To wean families off continuing assistance, promote job preparation, and encourage work participation.

Under this program, the Canadian government provides financial support to indigenous entrepreneurs looking to launch or expand their businesses. The funding thus creates opportunities for employment, income generation, and overall economic growth within the indigenous communities. This not only contributes to the economic well-being of the community members but also preserves and promotes their unique cultural identity through self-sustaining businesses.

The LEADER program by the EU funds innovative, community-led, local development projects in rural regions. The program empowers local action groups composed of public, private, and civil society representatives to devise development strategies that cater best to their respective regions. This emphasises the community's role in shaping its own development path, thereby ensuring sustainable and inclusive growth.

If limited to certain sectors or countries, concentrated funding can exacerbate the problem of over-reliance on specific commodities, creating trade imbalances. For instance, if most of the funds for development are poured into strengthening oil production in a specific developing country, it accentuates its dependence on oil exports. As a result, the country becomes vulnerable to price fluctuations on international markets and competitiveness concerns, culminating in trade instability.

Argentina’s economic crisis of 2001 was largely caused by overdependence on international loans for funding economic development. As the country accumulated extravagant debts, it found itself unable to repay. Consequently, it defaulted, leading to an economic catastrophe characterised by soaring unemployment, rampant inflation, and a dramatic fall in output.

An instance of this was seen with the Structural Adjustment Programs (SAPs) imposed by the International Monetary Fund and the World Bank in the 1980s and 1990s. To receive the development funding loans, countries were required to implement certain policies such as liberalising their economies, cutting public expenditure, and devaluing currencies. These significantly impacted international trade and changed global monetary dynamics.