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Foreign Aid & its role in economic development

Foreign Aid & its role in economic development

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Published by Abrar Ahmed Qazi
Foreign Aid and Its Role in Economic Development_Management of pakistan economy
Foreign Aid and Its Role in Economic Development_Management of pakistan economy

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Categories:Types, Business/Law
Published by: Abrar Ahmed Qazi on May 15, 2011
Copyright:Attribution Non-commercial


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Foreign Aid and Its Role in EconomicDevelopment
Definition of Foreign Aid:
Foreign Aid occurs when the recipient country receives additional resources inforeign currency over and above the capacity to import generated by exports. Insimple words, foreign aid means those additional resources which are used toraise the performance of the recipient country above the existing level. It can bedefined as the debt which is given by a country to another country on theconcessional rates. The concessional elements may be:
Lower rates of interest than the prevailing rate of interest in theinternational commercial money market.
Longer period for repayments.
Grants which does not entail the payment of other principal or interest,i.e., a free gift.A country which gives loan is called donor and the country which receives theloan is called recipient country.
Types of Foreign Aid:
There are two types of foreign aid, according to their source:
Bilateral Aid:
Bilateral aid is the aid which is given from the governmentof the donor country to the recipient country. It depends upon political andeconomic relationships of various countries and it also depends on the willof donor country.
Multilateral Aid:
 Multilateral aid is the aid given by certain financialinstitutions, agencies or organisations to the government of developingcountry. It is distributed in a fair manner in order to raise the pace of economic development. So it is better than bilateral aid which is given onthe basis of political considerations and the fear of the domination of adonor country is also removed in the case of multilateral aid which may behelpful in raising the pace of economic development.
Forms of Foreign Aid:
Following are the forms of foreign aid:
Financial Aid:
The simplest form of capital inflow is the provision of convertible foreign exchange, but very little foreign capital indeed comesto the underdeveloped world so conveniently. Financial aid is further divided into various sub-forms, i.e.:
Tied Aid:
 Tied aid is of two types:
Nation Tied Aid:
is given to the recipient country on the condition thatshe will spend it in the donor country to solve the BOP problems of thatcountry and to stimulate exports, i.e., if Pakistan is given aid by US and isasked to import raw materials or machinery from US only then it isnation tied aid or resource tied aid.
Project Tied Aid:
is given only for specific projects and the recipientcountry cannot shift it to other projects.
Untied Aid:
 Untied aid is the aid which is not tied to any project or nation. It is, in all respects, better than the tied aid because it offersmore efficient use of foreign resources. It is much desired because inthe case of untied aid the recipient country is not bound to spend theforeign resources on specific projects or in the donor country which maycharge higher prices than international market.
 A grant is that form of foreign aid which does not entail either the payment of principal or interest. It is a free gift from onegovernment to another or from an institution to a government. It ismuch desired because it increases the internal expenditures andgenerates income. It is given on the basis of humanitarianism,especially in days of emergencies, earth quakes, floods, wars, etc.
It is the borrowing of foreign exchange by the poor country fromthe rich country to finance short-term or long-term projects. They arefurther sub-divided into two types:
Hard Loans:
Hard loans are also called short-term loans.In order to finance industrial imports they are given usually for aperiod less than five years, and they are paid in the currencyborrowed. It contains no concessional element but interest rateis usually lower than the prevailing rate of interest in theinternational market.
Soft Loans:
Soft loans are also known as long-termloans. Soft loans are made for 10-20 years and it is repaid inthe currency of recipient country. Interest on these loans islesser than hard loans and often these loans invoice graceperiod. Concessional elements are comparatively greater.
Commodity Aid:
 Commodity aid, in fact, is another type of tied aid, whichrelates to agriculture products, raw materials and consumer goods. Under commodity aid, the donor country has much political influence on therecipient country, for example, in 1960s, US gave wheat to Pakistan under PL-480 and had much influence on the development policy of Pakistan.Commodity aid may be received in cash form or in the form of food grains:
In Cash Form:
If it is received in cash form it may be more helpfulbecause then a country may buy more commodities from cheaper sources.
In Food Grain Form:
It is a special type of commodity aid, which isgiven in the form of food grains only, for example, US gives foodgrains to the poor country under Public Law (PL-480) and fundsobtained from it are used on American companies and agenciesoperating in the recipient countries. The rest of the aid is granted.
Food Aid:
There is more than enough food produced each year to feedadequately everyone on earth. However, food is so unevenly distributedthat malnutrition and hunger exist in the same country or region wherefood is abundant.During 1960s, the United States sold a sizable fraction of its agriculturalexports under a concessionary Public Law 480, where LDC recipientscould pay for the exports in inconvertible currency over a long period.During late 1970s, about three-quarters of the food aid went to low-incomecountries. It was about one-third of their cereal imports. Projectionsindicate that food deficits are likely to increase in the 1980s and 1990s. Inthe early 1980s, the United States, which provides the bulk of total foodaid, reduced its food assistance.Critics of food aid argue that it increases dependence, promotes waste,does not reach the most needy and dampens local food production.Nevertheless, the food aid has frequently been highly effective. It plays avital role in saving human lives during famine or crisis, and if distributedselectively, reduces malnutrition. Unfortunately, poor transport, storage,administrative services, distribution networks and overall economiccomplex hinder the success of food aid programmes, but the concept itself is not at fault.
Technical Aid:
 Technical aid is another form of tied aid and is muchuseful for the recipient country to increase the pace of economicdevelopment by using the modern technology or skill in some specificsectors of the economy. Under this aid programme, training facilities areprovided by the donor countrys government and it bears all the

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