The Role of Foreign Aid in the Pakistan Economy EMBA-BFS-2
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The misery of Under Developed Countries like Pakistan, which have the resources tobecome a prosperous country, however, have not fully achieved their potential, is mainlyassociated with the problem of
. Because of low incomes, the saving ratios alsoremain low, resulting in low investment levels. At the same time, due to low income thetaxable capacity remains lower, i.e. government earnings also remain low. Due to low levelsof investment along with the low income on the part of the government the country facessaving-investment deficit as well as the deficit in balance of payments.The theory of Two Gap Model suggests that theeconomicdevelopment policy focuses ontwo constraints: the need for savings to finance investment, and the need for foreignexchange to finance imports
. The Two-Gap Model suggests that developing countries haveto rely on the Foreign Inflows to fill these two gaps. The Foreign Inflows are available invarious manifestations to a country, which includes the grants, loans, foreign directinvestment (FDI), export credit, project/non-project assistance, technical assistance andemergency relief etc.Moreover, the nature of the FI available to a country also depends upon various factorshowever mainly on the size of the country its economic circumstances. African nations relymainly on the foreign aid however countries in East Asia enjoy the benefit of foreign directinvestments owing to their investor friendly policies and the availability of infrastructure inthe form of land and human resource. In case of Pakistan the foreign aid is mainly in theform of foreign aid because it lacks physical, financial & human capital as well as political ¯oeconomic stability, which are the main attraction for foreign direct investments.