Foreign Aid

In the name of Allah, the most beneficent, the most merciful.

FOREIGN AID Ma’am Quairat-ul-Ain Beenish

Group Members Muhammad Munair BT-04-07 Kanwer Ahmad Ali BT-04-30

Foreign Aid (FA) FA occurs when recipient country receives additional resources in foreign currency over and above the capacity to import generated by exports The debt which is given by a country on the concessional rates.The concessional elements may be: Lower rate of interest Longer period of repayments Grants

Definition in term of officials data. “All kinds of resources inflows that are publicly granted and are made either from government to government or from financial institutions to a government.” Resources inflow Publicly granted From government to government From financials agencies to government Economic aid(used for economic purposes)

Donor: loan/ aid.

The country which gives

Recipient: the loan/aid

The country which receives

Forms of Foreign Aid Financial Aid Commodity Aid Food Aid Technical Aid Emergency aid Double Tied Aid

Financial Aid

Tied Aid Untied Aid Grants Loans

FINACIAL AID

UNTIED AID

TIED AID

NATION TIED

GRANTS

PROJECT TIED

HARD LOAN

LOANS

SOFT LOAN

Tied Aid Tied aid means that the donor country requires the recipient country to spend it on a specific project or buy resources from specific country. Nation Tied Project Tied

Untied Aid FA which is not Tied to any project or nation is untied aid. Much desired by Recipients. LDC do more efficient use of financial resources.

Grants A grant is that form of FA which does not entail either the payment of principal or interest. Free gift from govt. to govt. Free gift from an institution to govt. Mostly desired because it increase Expenditure and generate Income. Humanitarianism bases In 1956-65 73% now only 0.2%

LOANS It is borrowing of foreign exchange by the poor country from the rich country to finance the short term or long term projects. Hard Loans Soft Loans

Hard loans Also called short term loan Paid in currency borrowed No concessional element (but interest rate is usually lower then market rate) Usually for 5 year duration

Soft Loans Also called long term loan Repaid in the currency of recipient country Interest on soft loan are lesser than hard loan and often involve grace period Usually for 10-20 years

Commodity Aid A type of tied aid which relates to agricultural products, raw materials and consumer goods Advantages It help in controlling famine. Tempo of industry is maintained by providing raw material.

Disadvantage It is not in the form of cash. Commodity aid has depressing effect on agricultural prices in recipient country. Donor country have more Political Influence on the recipient Country

Food Grain Loan Loan which is given in the form of Food Grains e.g. US give food grain to poor country under Public Law(PL 480) and fund obtain from it are used on American Companies and Agencies working in Recipient Countries and rest of funds are Granted

Commodity Aid to Pakistan Second Largest component in different types of aid. But ratio decreases from 34% in 1960-65 to 23% in 1979-80

Food Aid Food is given to countries in urgent need of food supplies, especially if they have just experienced a natural disaster.

Critics Increase Dependence Promote Waste Availability to Needy Dampens the local food production

Food Aid to Pakistan Third largest Component of aid Provided by USA Govt. to Pak Govt. From Wheat to Edible Oil Funds Generated by these trade are control by US Aid Mission in Pakistan

Technical Aid It is a tied aid in which training facilities are provided by the donor country and it bears all the expenditures involved in the training of advisory technocrats

Technical assistance People are recruited in Donor country for service overseas. Scholarships and training facilities provided in donor country from recipient country e.g. Army Expertise, Post Office Services

Drawbacks Heavy influence of Donor Country Modern technology favor by expertise whether it is appropriate or not Indigenous technology may be affected Creation of Bangladesh due to Influence of Harvard Advisory Group during Second Five Year Plan

Emergency aid This is given to countries in the event of a natural disaster or human event, like war, and includes basic food supplies,clothing and shelter

Double Tied Aid It is also called as procurement tied aid. It is the aid which is tied both for projects and as well as for resources

Foreign Direct Investment (FDI) It basically refers to the amount of foreign exchange invested in a particular country by other countries corporation and businesses Foreign investment basically refers to the amount of money & machinery injected in a country market by the multinationals.

Foreign Direct Investment (FDI) FDI is much cheaper for recipient country FDI brings technical know-how and modern technology in developing countries

Critics Profit outflow may exceed the amount of repayment for loans Technical knowledge can purchased on commercial basis Examples Lever Brothers ICI Pepsi

FDI CONTROL It should be licensed. It should be taxed more than domestic investment and proper audit. All abroad payment should be controlled or limited Reinvested capital should be considered as domestic capital.

TYPES OF AID Bilateral Aid: The aid which is given from the government of the donor country to the recipient country is called bilateral aid. Depends upon political and economic relationship of various countries and it also depend upon the will of donor country.

TYPES OF AID Multilateral Aid:

Aid given by certain financial institutions,agencies or organizations to the government of low developed country (LDC) e.g. World Bank,IMF, European Development Fund, United Nations Usually these organizations are governed by major donors.

Aid to Pakistan

Why donor give aid Not without any corresponding benefits Political motivation Economic motivation Economic motivation and self interest

Political motivation Marshall plan (Reconstruction of western Europe) Shift in Cold War toward LDC’s Security Issue Shaky Regimes FA used as political lever to Prop up Friendly Regimes

Anti Effects Fidel Castro in Cuba Threat of Communist in Latin America Losing importance of Security issue War against Vietnam,dollar crisis and increase in domestic violence People’s view is changing

Economic Motivation Foreign Exchange Constraints Two Gap Model  Saving

Gap  Trade Gap

Growth And Saving Technical Assistance Absorptive Capacity “the ability of a country to absorb the foreign assistance to use the funds in a wisely and productive manners”

Economic Motivation & Self-Interest Shifting in Trend of Grants toward Loan(80% to 40% ) Debt repayment burdens increase Biggest Misconception  US

aid Official view  British Minister View

Why LDC recipient accept Aid Three reasons(1 major, 2 minor) Economic Growth  

Taught in University Courses by referencing Success Examples(Taiwan, Israel. South Korea). Conflicts on from of aid not on role of aid.

Political view   

Financial Aid Military And Internal Security Stop Opposition Resistance

Continue……. Moral View  Past

Exploitation  Obligation of Rich country to support the Third World Countries.

The effect of aid Two views  Economic

traditionalist  Rationalist view

Economic Traditionalist Promote Growth Structural Transformation Help in BOP, Inflation, Govt. Deficits Employment

Rationalist Substituting effect on Domestic Savings & Investment Increase BOP & Debt Growth of Modern Sector Change in Living Standard Increases the Gaps(Saving, Foreign Exchange, Urban-Rural/ModernTraditionalist )

Two Gap Model(TGM) Hollis Chenery & A. Strout. Saving & Foreign Exchange Gaps Foreign Aid as an Instrument to achieve the target growth rate. Model Based on three stage toward Growth Absorptive Capacity Saving Gap Trade Gap

Process of Substantial Growth Absorptive Capacity FA Saving Gap

Trade Gap

FA

FA

• • • •

Technical Assistance Training, Education Managerial Ability Entrepreneurial Talent

•Funds for Developmental Projects • Aid for Saving Deficits

•Funds for BOP • Raw Material • Modern Machinery • Foreign Exchange

Pledges:  A pledge is a promise by the donor to advance a specified amount of FA Commitment:  It implies the allocation of FA by the donor for specific projects or programmes Disburdenment of Aid:  It mean the transfer of resources to recipient from donor Utilization of Aid:  The actual implementation of FA financed projects

Critical Appraisal

TGP doesn’t include the Debt Servicing Charges & Term and Condition attached to aid. TGP doesn’t consider the Absorptive Capacity of the Economy TG analysis is high aggregative approach which treats all types of capital investment as homogenous LDC’s which have dominant saving constraint do not need foreign aid Country cant follow the export promotion and import substitution policies Consider the parameters having stable value in future which is not possible

TGP & Pakistan Absorptive Capacity is not applicable in Pakistan Saving & Net Inflow of Capital has negative Correlation Trade Gap is increasing due to imports of new machinery and other commodity goods