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 exportsThe debt which is given by a country on the concessional rates.The concessional elements may be:

Lower rate of interestLonger period of repaymentsGrants

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: The country which gives loan/ aid.

Recipient: The country which receives the loan/aid

Forms of Foreign Aid

Financial Aid

Commodity Aid

Food Aid

Technical Aid

Emergency aid

Double Tied Aid

Financial Aid

Tied AidUntied AidGrantsLoans

FINACIAL AID

UNTIED AID GRANTS LOANSTIED AID

NATION TIED PROJECT TIED SOFT LOANHARD 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

AdvantagesIt help in controlling famine.

Tempo of industry is maintained by providing raw material.

DisadvantageIt 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

Technical assistancePeople 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

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

Drawbacks

Heavy influence of Donor CountryModern technology favor by expertise whether it is appropriate or notIndigenous 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

CriticsProfit 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 motivationEconomic motivationEconomic 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 ConstraintsTwo Gap Model Saving Gap Trade Gap

Growth And SavingTechnical AssistanceAbsorptive 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/Modern-Traditionalist )

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 CapacitySaving GapTrade Gap

Process of Substantial Growth

Absorptive Capacity

Saving Gap

Trade Gap

•Funds for Developmental Projects• Aid for Saving Deficits

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

• Technical Assistance• Training, Education• Managerial Ability• Entrepreneurial Talent

FA

FA

FA

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 AppraisalTGP doesn’t include the Debt Servicing Charges & Term and Condition attached to aid.TGP doesn’t consider the Absorptive Capacity of the EconomyTG analysis is high aggregative approach which treats all types of capital investment as homogenousLDC’s which have dominant saving constraint do not need foreign aidCountry cant follow the export promotion and import substitution policiesConsider 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