How Do Governments and Non-Governmental Organizations Assist in Economic Development?

Several governments and non-governmental organizations (NGOs) assist economic development by providing financial resources, improving public institutions, and boosting government-to-government aid. 

But how governments and NGOs assist in economic development remains a significant challenge for many governments. Some governments are reluctant to give aid to developing countries for several reasons, including a lack of understanding of how to assist, a lack of trust in the effectiveness of the aid, and a belief that they cannot effectively implement the aid.

Increased government-to-government aid

Despite the numerous studies focusing on the effect of foreign aid on economic growth, there is no consensus on whether this relationship is positive or negative. Some studies have suggested that the aid-growth relationship is linear, while others have argued that it is nonlinear. The current study investigates the role of economic freedom as a mediating factor in the relationship.

Low-income African countries have relied on grant inflows to finance essential infrastructural developments. However, developing a decentralized economy depends heavily on the trust and cooperation among local governments, the private sector, and civil society organizations. Stated differently, promoting greater economic liberty and establishing more effective organizations is crucial.

A U-shaped relationship between foreign aid and economic growth was found in a recent study. A 1% increase in the ratio of aid to GDP yields a 2.75% increase in economic growth. 

When aid inflow is at lower levels, it has a detrimental impact on economic growth, but at higher levels, it has a positive effect. This association is non-linear, implying that the impact of aid on economic growth is more significant in countries with higher institutional quality.

The study used a large panel of developing countries. A panel threshold regression was used to uncover the mediating role of institutional quality. The relationship was found to be statistically significant. The effect of aid on economic growth depended on the threshold level.

The threshold level of aid is determined by examining the economic, social, and financial development of 44 countries. For example, higher economic freedom indicates a more liberal economy.

Crowd out public programs.

Several economists have weighed in on the crowd-out effect, which is the effect of a government spending program on private spending. They claim that increased government spending will reduce private spending in the long run.

The crowd-out effect is a trickier subject to pin down. Essentially, increased government spending

will increase the supply of financial capital and reduce the money available for private investment. 

This means that the capital stock will not grow as quickly. This means that future generations of Americans may not benefit as much from a government spending program as they might have.

However, the crowd-out effect is not the only way government spending can impact the economy. In

Most economists agree that deficit spending can be effective in a short-term economic downturn. 

If the government is willing to borrow for spending, it can do its part to stimulate private spending. The effect can be offset by decreases in private spending, as people may feel that their charitable donations are less critical than paying taxes.

The crowd-out effect is a pickle, but it does have some interesting properties. The best example is government spending on infrastructure. This can increase the value of private investments, making them more effective. For example, government spending on a highway can reduce the cost of shipping goods. It can also crowd out certain types of business, decreasing the shipping industry’s capacity to compete.

The crowd-out effect has been a long-standing topic of debate, but the jury is out on how large it is. What is clear is that the effect above is a good thing, but its real long-term consequences are unclear.

Improve public institutions

Improving public institutions for economic development in Africa is essential to reduce poverty and increase growth. Effective institutions protect the rights of property owners and entrepreneurs. They also promote a stable economic environment that is transparent and allows for efficient private sector activities. 

Moreover, well-functioning institutions can promote sustainable development programs.

Various authors have emphasized the importance of improving institutions for long-term economic growth and welfare creation. Institutional quality is the state variable that drives economic change. It can be an essential contributor to cross-country variations in economic growth.

Institutional quality includes limitations on executive power, defined as humanly devised constraints. These constraints can either be formal rules or informal constraints. The degree of effectiveness of a limit on executive power depends on the enforcing characteristics of the institution. Moreover, limitations on executive power help protect individuals and entrepreneurs.

Despite the ambiguity of institutional quality as a driving force for economic progress, its positive impact on growth performance has been widely reported. Some authors, however, challenge its validity. Institutional quality has also been shown to correlate with per capita income levels.

This relationship is not perfect. However, it is still statistically significant. It also has robust results in extended periods. This requires further analysis.

Institutional quality is a state variable that has been shown to correlate with per capita income levels, but its relationship with income convergence is not always clear. 

Nevertheless, the income convergence of the 1990s moves towards weak convergence in the top levels of institutional quality. This is likely the result of an upward movement in per capita incomes.

The authors note no direct relationship between a country’s membership in the European Union and its institutional quality. However, European institutional quality outperforms the global average on all seven components. This means that European institutions are more robust than the global average in several areas, including political stability and control of corruption.