Development Economics

1. Development Economics

2. Development Economics Foreign Assistant and Economic Development

3. Foreign Assistant and Economic Development: The government may receive economic assistance from other countries to increase the rate of capital formation in the country. In most of the developing countries, the internal sources of raising capital are not adequate to accelerate the rate of development in the desired extent. The less developed countries, therefore, have to depend upon the external sources or foreign aid.

4. Foreign Economic Assistance: • External Assistance are the loans which are taken by the developing countries from abroad for purchasing machinery and equipment building of dams and covering the balance of payment deficit. • Foreign economic assistance is the flow of resources and technical assistance from a developed country or an international organization to stimulate domestic development efforts of a less developed country. • The developed countries are extending loans to the less developed countries in the following ways: • in cash, • in kind • Expertise.

5. Sources of Foreign Economic Assistance: • There are two main sources which provide foreign aid: • Bilateral Sources • Multilateral Sources. • In case of bilateral, • the aid is from the government of a developed nation to the government of a less developed nation. • In case of multilateral, • the sources are international aid giving agencies such as world Bank, IMF etc.

6. Forms of Foreign Economic Assistance: • The economic assistance provided on bilateral or multilateral basis may take the following forms: • Grants • Loans • Technical Assistance • 1. GRANTS: • The developed nations and the aid giving institutions help the poor nations on humanitarian grounds in times of emergency. For instance, if a developing country is faced with natural disaster like flood, earthquake, famine etc, the rich countries help them and provide money grants or commodity grants or both. The grants provided as a gesture of goodwill and under sympathetic attitude are not repaid to the donor countries or the institutions. These do not have repayment obligations.

7. Forms of Foreign Economic Assistance: 2. FOREIGN LOANS: Foreign loans are provided in the form of foreign exchange, machinery an technical services. The recipient country is to repay the loans along with interest in down payments (installments) to the donor country or the aid giving institutions. If a loan is given at a nominal rate of interest ranging from 1 to 3% and repayable after 25 years, it is called soft loan. In case the rate of interest on loan is higher than 3% and repayable within 25 years, it is called hard loan.

8. Forms of Foreign Economic Assistance: Tied and Untied Loans: The loan given by the donor countries may be tied or untied. A Tied Loan is that which is tied to source and utilization. When aid is tied the receiving country has to make purchases from suppliers in donor countries only, An Untied Loan is the loan or aid which is not tied to both source and utilization. The recipient country can spend the loan on the purchase of the required commodities from anywhere on competitive prices i.e. low prices. The recipient countries is not bound to purchase the required commodities from the donor country.

9. Forms of Foreign Economic Assistance: 3. TECHNICAL ASSISTANCE: The developed nations are also providing technical experts in the erection, installation and working of heavy projects like steel mills, power stations etc. to the less developed countries. They also carry out economic surveys and offer financial advisory services to the developed countries.

10. Benefits of Foreign Economic Assistance: The main benefits of foreign economic assistance are: 1. Increasing the level of investment:most of the developing countries are facing the problems of low rate of savings and as a result there is low level of investment. Foreign loans are required to supplement domestic savings for bridging the resource gap between the desired investment and the domestic savings. 2. Building Infrastructure: Foreign Loans can help the country in developing various infrastructural facilities which require huge investment such as transpiration, communication, power generation, irrigation etc.

11. Benefits of Foreign Economic Assistance… continued 3. Undertaking Risky Projects:due to shortage of capital and low expertise, the domestic capital is usually shy of undertaking risky projects, like oil and gas exploration, mineral resources etc. the country with the help of foreign capital and necessary expertise can undertake such risky projects and explore the natural resources for economic development of the country. 4. BOP Support: Most of the developing countries including Afghanistan due to heavy import of machinery, chemicals and other necessary equipments are facing deficits in balance of payments year after years. The foreign exchange gap caused by excess import/export is filled up with the inflow of foreign capital from IMF.

12. Benefits of Foreign Economic Assistance… continued 5. Development of Basic Industries:foreign loans can assist in building the basic industries like iron and steel, petroleum, heavy engineering etc in the country. 6. Provides greater employment opportunities: The financing of various projects with the help of foreign assistance provides greater employment opportunities in a country. 7. Increase productivity of various economic sectors: The inflow of capital and technical know-how increases the productive capacity of various sectors of the economy.

13. Benefits of Foreign Economic Assistance… continued 8. Provision of Higher Quality Products: The foreign capital helps in the establishment of industries in the country. The inflow of technical knowledge improves the quantity and quality of manufactured goods and makes them available at lower prices to the domestic consumers. 9. Increase in Tax Revenue: The profits earned on foreign investment are taxed by the government. The revenue of the state is thus increased.

14. Benefits of Foreign Economic Assistance… continued 10. Social Changes: Because of foreign inflow of capital, technology, culture and skill, the changes in socio-economic setup of a country occur. The life style of the people changes; educational and technical education gets popular, the narrow life of the villages come to an end; the skills of the people improve; the wages and incomes of the people increase, the chances of employment increases, the standard of living of the people improves and the markets are extended.

15. Costs of Foreign Economic Assistance: • Foreign aid is useful provided it helps in overcoming bottlenecks in the way of economic development of a country. It has been observed the most of the developing countries including Afghanistan are not fully utilizing the foreign aid. As such the costs of foreign aid is very heavy on the recipient country. The burden of foreign debt can be judged from the following facts: • The burden of debt servicing is increasing as time passes. Debt servicing as a percentage of export earning is increasing. • The tied loans given to a developing country raise the economic cost of the donor country if it is faced with inflation. • The donor country may misdirect and burden the economy of a developing country by giving project tied loans which are not on the priority list of the country.

16. Costs of Foreign Economic Assistance…. continued • The domestic agricultural production may be discouraged by the receipt of commodity aid from the developed nations. • An import substitution industry established by foreign assistance may continue depending on the import of essential raw material from the rich countries. • Foreign Aid is a danger to the freedom of a country. There may be political strings attached to the bilateral loans. • Debt overhang may also discourage efforts by the government to carry out basic fiscal reforms. • The piling of debt depresses growth by increasing uncertainty among the foreign investors.

17. Donor Country and the Economic Assistance: • Here a question may be asked as to why the developed nations are kind in giving aid to the developing countries? • According to the rich nations, the foreign aid is given for a combination of humanitarian and self interest reasons. • Humanitarian ground. • If a country is faced with famine, drought, diseases, earthquake etc. it is obligatory for the developed nations to help that country financially purely on humanitarian ground. The rich countries are generously extending economic assistance in the forms of grants to the poor nations of the world.

18. Donor Country and the Economic Assistance…. continued • B. Self Interest Reasons. • Foreign economic assistance is provided on the following self interest reasons by the donor country. • The foreign aid may be given to protect the developing countries from the spread of communism or any other religion. • The donor country may have surplus products. In order to check the fall in the prices of products in the domestic market and to maintain level of production, the surplus goods are exported to the needy countries on loan. • Some advance nation, particularly the socialist countries, provide financial and technical help for the propagation of political ideology in the capitalist developing countries. • Foreign aid is also given for increasing the camp followers of the donor countries.

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