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Sunday, 22 May 2011

What is Foreign Aid and discuss its Importance in the Economic Development of Less Developed Countries or discuss the advantages and disadvantages of

Importance of Foreign Aid :-
Foreign aid is a controversial issue. Some people say that foreign aid helps in permoting the economic growth. While others argue that capital is not a single factor in increasing the rate of development in the country. It increases the burden of debt . Following are its main benefits :

1. Increase in Production :-
The inflow of capital and technology increases the production capacity of the various sectors of the economy. It also helps to establish the new industries in the country.

2. Increase in Investment :-
In the less developed countries like India and Pakistan rate of savings is very low. We can not meet the investment requirements of the country.So foreign loan fills the gap between savings and investment. It increases the rate of investment. In India or Pakistan saving rate is 14% of GNP, which is not sufficient to meet the requirements.

3. Closes the Trade Deficit :-
The less developed countries balance of payment remains deficit . So this deficit is met by the foreign aid. The exports earning in these countries are falling short of import requirements. So this foreign exchange gap is met with inflow of capital.

4. Increase in Employment :-
With the help of foreign aid different development plans can be started. It increases the rate of employment in the country. For instance when new factory will be established, new workers will be also employed.

5. Increase in Real Wages :-
The foreign resources are very helpful in improving the efficiency of the workers. So their real wages will increase according to their marginal product. In flow of technology improves the per capita output.

6. Increase in Government Revenue :-
The profit earned on foreign investment are taxed by the government. In this way revenue of the state increases. As the new projects are started by the foreign investors revenue also increases.

7. External Economies :-
Due to the flow of foreign aid, the firms can avail the benefits of the external economies like training of labour and introduction of new machinery.

8. Improvement in the Quality of Production :-
Foreign aid increases the number of industries in the country. The inflow of technology improves the quality of production and reduces the cost.

9. Increases the Rate of development :-
The economic history of U.S.A, Canada, Australia and Norway shows that they borrowed the foreign resources in the initial stage of development and today they are in the list of advanced countries. So the proper use of foreign aid can be also useful in developing countries.

10. Creates Love and Brotherhood :-
Foreign aid creates love and brotherhood among the rich and poor nations of the world. The inflow of foreign aid makes the poor nation prosperous.


1. Increases in the Burden of Debts :-
The burden of debt increases as the time passes. In this regard we can examine the record of Pakistan and Brazil. The debt burden of Pakistan increasing day by day. Debt servicing as a percentage of GDP is 33% on out standing debt.

2. Payment of Interest :-
The rate of interest is very high in the world market and its payment becomes a problem for the borrower country. Major portion of the exports is used to debt servicing in these countries.

3. Dangerous for Freedom :-
Foreign aid also brings political pressure with it, which is harmful for the independence of the country. Even Donee country can not frame the foreign policy according to its own wishes.

4. Tied Loans :-
Sometimes conditions are accompanied with the foreign aid which becomes harmful for the donee. For example in the period of Bhutto 131% devaluation of currency was suggested by IMF and Pakistan accepted because economic aid was needed.

5. Delay in Receipt of Aid :-
Sometimes foreign aid is not received in time which causes the failure of the plan. For example in Pakistan the major cause of failure 3rd five year plan was the delay in the receipt of foreign aid.

6. Foreign Dependence :-
If once the country borrows the foreign aid it becomes dependent for ever. So it is better that one should maximum rely upon the domestic resources.

7. Cause of Inflation :-
If foreign aid is misused for unproductive purpose then it may create inflation which is harmful for the economy. In spite of many problems we can say that aid can speed up process of economic development if it is used carefully for the productive purposes only.
On the other hand if government of the country is ineffective education standard is low then only foreign aid can not improve the rate of development in the country.


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