CHAPTER 12

FOREIGN ASSISTANCE AND DEVELOPMENT IN BANGLADESH

Anisul M. Islam

INTRODUCTION

With a large population (about 120 million) living in a small land area (55,000 sq.
miles) and with a low annual per capita income (about u.S. $250), Bangladesh is
classified as one of the poorest countries in the world. Because of its precarious eco-
nomic condition, various donor countries and agencies have provided the country
with substantial amounts of public foreign assistance. Since its independence in 1971
to the year 1992, Bangladesh has received a cumulative sum of 24 billion dollars in
foreign aid (grants and loans) from all donor countries and agencies combined (ERD
1993). In 1992 alone, it received a sum 0[$1,611 million in foreign aid (ERD 1992)
which constitutes about $14 per capita and about 7 percent of its 1992 GOP. More
importantly, foreign aid constitutes an extremely high proportion (about 90 percent)
of the country's development budget.
Bangladesh thus provides a test case for examining the role and effectiveness of
foreign aid in promoting economic development in the context of a developing econ-
omy. The objectives of the paper are to study the following issues dealing with for-
eign aid to Bangladesh: (i) the need for foreign aid; (ii) trends in aid flows; (iii) types
of aid flows; (iv) aid dependence; (v) sources of aid flows; (vi) costs and terms of
aid; (vii) the debt burden; and (viii) the effectiveness and productivity of aid flows.

NEED FOR FOREIGN AID: THE TWO GAPS

Foreign aid has been used to overcome the following two critical gaps: (i) the do-
mestic savings-investment gap; and (ii) the export-import gap (also known as the
foreign exchange gap). The former is shown in Figure 12.1 as the difference between
SY (domestic savings-GOP ratio) and IY (investment-GOP ratio). The graph shows
that the gap has remained quite high over the years. In 1989, for example, the IY ra-
tio was 11.7% whereas the SY ratio was less than 2%. Note that the SY ratio has re-
mained quite low since independence. This fact indicates that the country has failed
to generate adequate resources from domestic sources to fmance it's development
activities. The foreign exchange gap is shown in Figure 12.2 by the difference be-
K. L. Gupta (ed.), Foreign Aid: New Perspectives
© Springer Science+Business Media New York 1999
212 Foreign Aid: New Perspectives

tween TXY (export-GDP ratio) and TMY (import-GDP ratio). The import ratio re-
mained consistently at a much higher level than the export ratio for all the years since
1972, and the gap reached a peak in 1982 (TMY of 21.8% minus TXY of 7.5% =
trade gap of 14.3%). The gap declined somewhat after 1982 but it still remains at a
high level (with TMY of 16.5% and TXY of 8.7%, the trade gap was 7.8% ofGDP
in 1990). Thus the extent of the two above mentioned gaps indicate the continuing
need for foreign assistance to overcome these obstacles.

Figure 12.1. Savings and investment ratios (% of GOP).

20~----------------------------~

%
15

10

5 : \~ . .,--
, , SY "..... ", . .
,'/\,\ II ,\_-_. . . ','\\\,___ . . . -_. . . . ' ...
. . . . --,'"
1

o \, ,I \--\' ,:
"I, '\:,
V ,.

72 74 76 78 80 82 84 86 88 90 92 94
IY ---- Syl
YEAR
1-
Figure 12.2. Export and import ratios (% of GOP).

25.-----------------------------,
%
/~\
20 . / "\ .
", "

!\ / \/\\TMY _--/~'", ___ ------

, \, I \/'---'
15 ""/\\'" : \,' '---........

10 \./

72 74 76 78 80 82 84 86 88 90 92 94
1- TXY __ m TMyl YEAR